The Fed Shutdown Poll and Megathread

[Sheilbh]

Probably because Congress is ass.

Kind of.  I think they're basically worried that the US system won't be able to set a medium-term deficit reduction plan:

Despite these exceptional strengths, we note the U.S.'s fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.

In 2003-2008, the U.S.'s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most 'AAA' rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.

security discretionary spending to levels similar to those proposed by the Fiscal Commission in December 2010, holding growth in base security (excluding war expenditure) spending below inflation, and further cost-control measures related to health care programs. Revenue would be increased via both tax reform and allowing the 2001 and 2003 income and estate tax cuts to expire in 2012 as currently scheduled–though only for high-income households. We note that the President advocated the latter proposal last year before agreeing with Republicans to extend the cuts beyond their previously scheduled 2011 expiration. The compromise agreed upon in December likely provides short-term support for the economic recovery, but we believe it also weakens the U.S.'s fiscal outlook and, in our view, reduces the likelihood that Congress will allow these tax cuts to expire in the near future. We also note that previously enacted legislative mechanisms meant to enforce budgetary discipline on future Congresses have not always succeeded.

Key members in the U.S. House of Representatives have also advocated fiscal tightening of a similar magnitude, US$4.4 trillion, during the coming 10 years, but via different methods. House Budget Committee Chairman Paul Ryan's plan seeks to balance the federal budget by 2040, in part by cutting non-defense spending. The plan also includes significantly reducing the scope of Medicare and Medicaid, while bringing top individual and corporate tax rates lower than those under the 2001 and 2003 tax cuts.

We view President Obama's and Congressman Ryan's proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

[DGuller]

Oh, shit.

You have until Monday.

Whew, finally filed it in the nick of time.  Didn't take that much time.  If only filing the tax return were as simple as filing the extension. 

[Admiral Yi]

S & P says there's a 1/3 chance of a ratings downgrade in the next two years.

[Hansmeister]

I remember back in 2009 reading an article in Businessweek about a small bank in Texas that weathered the crisis well because they refused to participate in the subprime market.  The CEO was remarking how thru they decade he was constantly harrassed and threatened by federal regulators for refusing to participate in the subprime market.  He of course was feeling a littlebit smug about the whole thing because his refusal to cave in to banking regulators left him standing strong after the collapse.

Actually I think I heard an interview with this guy on NPR around that time.  Was the bank in like Amarillo, Lubbock or Waco, or another of the smaller Texas cities?

That sounds about right, they had about five branch offices in total. They found it incredulous that the Feds would take such a large interest in what they were, or in this case weren't, doing.  They did loans the old-fashioned way: loaning money to locals with good credit and holding the loans until maturity. Imagine that!

[Hansmeister]

You are correct. On all counts. Of course the reason they held on to them because they were perceived as risk-free investments since they could always sell to FM&FM in the end.

The banks thought that Freddie and Fannie would buy up their mortgages at face value even after they'd defaulted?  That doesn't sound right.

Think of it as playing musical chairs, just as with the dotcom bubble.  They ended up believing the hype of zero risk, I didn't say they were smart. Herd mentality at it's worst. As soon as 2005 Businessweek ran a cover story on how rising home prices made homes unaffordable fr the middle class in many cases, especially california and south Florida. In most California coastal cities around 98% couldn't afford traditional mortgages. Anybody with half a brain should've jumped ship at that time, just as with the dotcom bubble. It is amazing the herd mentality that leads supposedly smart people off the cliff.

[Razgovory]

You are correct. On all counts. Of course the reason they held on to them because they were perceived as risk-free investments since they could always sell to FM&FM in the end.

The banks thought that Freddie and Fannie would buy up their mortgages at face value even after they'd defaulted?  That doesn't sound right.

Think of it as playing musical chairs, just as with the dotcom bubble.  They ended up believing the hype of zero risk, I didn't say they were smart. Herd mentality at it's worst. As soon as 2005 Businessweek ran a cover story on how rising home prices made homes unaffordable fr the middle class in many cases, especially california and south Florida. In most California coastal cities around 98% couldn't afford traditional mortgages. Anybody with half a brain should've jumped ship at that time, just as with the dotcom bubble. It is amazing the herd mentality that leads supposedly smart people off the cliff.

Yet these are the very people you keep wanting to reward with tax cuts.

[Admiral Yi]

Think of it as playing musical chairs, just as with the dotcom bubble.  They ended up believing the hype of zero risk, I didn't say they were smart. Herd mentality at it's worst.

When you tried to pass all the blame to government regulation you implied very much that bankers were smart during the subprime bubble.  Or at least not stupid.

[HisMajestyBOB]

We're officially screwed:
http://www.washingtonpost.com/politics/most-support-budget-deal-but-oppose-cuts-to-major-programs/2011/04/19/AFK5077D_graphic.html



Nothing will be done to fix the biggest budget expenses, doom and gloom, etc.

[Berkut]

Ahhh, Dem populism is alive and well.

We've increased the Fed budget from $2.9 trillion a year 3 years ago to $3.8 trillion a year now.

And a proposal to ONLY increase it a further 2.8% a year is seen as ridiculously radical and fantasy by the Dems.

But no worries, we can just "tax the rich" and that will make it all work out. Even if it doesn't.

[Razgovory]

Yeah, and that's less populists then "Lets just cut aid to those damn welfare mom's".

[Habbaku]

Yeah, and that's less populists then "Lets just cut aid to those damn welfare mom's".

[Sheilbh]

But no worries, we can just "tax the rich" and that will make it all work out. Even if it doesn't.

I don't think it's necessarily populism.  I think the truth is - and I thought this during Hans's rant earlier - that most Americans like and support Medicare and Social Security.  Any deficit reduction plan that rests on cost control that won't actually guarantee they'll continue to do what they do just won't have support  from what I can see. 

No doubt you need to reform the way they work - though again I think the real issue is the uniquely American healthcare inflation problem - to be sustainable in the medium term, but similarly you need tax reform and, in the short term, spending cuts.  As S&P point out you need a mix of revenue and spending measures.  It's not enough to decry Dem populism when Ryan (who was on Bowles-Simpson but voted against it, as did all the other elected Republicans, because it increased taxes and didn't abolish healthcare reform) has published a plan that is based on mythical economic figures (as is Obama's budget, in fairness), that is politically implausible in terms of Medicare, that actually cuts taxes and that simply halves discretionary spending over the next decade without explaining quite how.  KRonn's point earlier about Ryan's plan taking until the 2030s to eliminate the deficit is right, but that's because he cuts taxes and spending - which isn't the most efficient way to cut deficits.  For what it's worth the mix in Obama's proposals - as reported over here - are 75% spending cuts and a reduction of 8% of GDP over the next few years, both are roughly equivalent to our deficit reduction programme and have been approvingly quoted by the government.

To be fair to the Democrats they've passed a number of cost control measures for Medicare and are proposing more.  Hans dismissed them earlier but the Kaiser Foundation and the OECD think they could be significant - though neither, nor the CBO are sure.  The reforms have, for the most part, never been done on a large scale so no-one actually knows how they'll work.

But you're right taxing the rich won't work.  Reduce tax expenditure, lower rates, broaden the base; reform Medicare; and, in the short term, cut defence and other discretionary budgets.  However I do worry you may need a crisis for anything to get passed - and one will come.

[MadImmortalMan]

I would include some sort of guidance mechanism. I do like the idea of a % of GDP hard spending cap. Or something similar which would be difficult to overcome during normal times.

[Sheilbh]

I would include some sort of guidance mechanism. I do like the idea of a % of GDP hard spending cap. Or something similar which would be difficult to overcome during normal times.

To be honest I think that's flim-flam for politicians to look good.  If Congress chooses to respect it they will - and it doesn't necessarily address deficits.  I mean the pay as you go rules are an example.  I think Congress and Clinton started creative accounting to get round it, then they expire and you get the Bush tax cuts and Medicare D.  They're brought back in but they've been changed this year so tax cuts don't count as expenditure.  It's a nice idea but what really matters is the political will.

[Ancient Demon]

Things are going to have to get much worse before most Americans will tolerate serious spending cuts.