Nouriel Roubini's Global EconoMonitor

RGE’s Wednesday Note – Obama’s Recent Regulatory and Fiscal Proposals

This week, RGE tracked a series of events that revealed the Obama administration’s juggling act: an effort to maintain growth, tame the fiscal deficit and garner the congressional support needed to implement policy. Democrats’ loss of the Massachusetts Senate seat raised questions about President Obama’s ability to take forward reforms on financial regulation, fiscal austerity and health care. Though Obama’s response was prompt and decisive, with proposals for financial-sector reforms that surprised markets and plans to address the ballooning fiscal deficit, his waning political capital will stand in the way of achieving his fiscal, social and economic goals.

Obama on January 14 proposed a Financial Crisis Responsibility Fee, a tax levied on the non-deposit liabilities of the largest financial institutions to cover the expected losses from the TARP program. The tax, expected to be imposed for at least 10 years, with an assessment of 15 basis points per year, would raise US$90 billion over that period and approximately US$117 billion over 12 years. Only firms with consolidated assets greater than US$50 billion would be affected, and over 60% of revenues would most likely be garnered from the 10 biggest firms. U.S. subsidiaries of foreign firms would also be subject to the fee.

Among the tax options on the table, which also include a global financial transaction fee (“Tobin Tax”) and a Bonus Tax, a risk-based fee is the most efficient solution. As previously advocated by RGE Chairman Nouriel Roubini and Lasse Pedersen in this op-ed, a similar systemic risk levy to finance a “resolution fund” is being considered in Congress as a way to internalize potential bailout costs stemming from too-big-to-fail institutions. Obama’s risk-based fee model is gaining traction at the international level, as this Critical Issue details. At the Davos Forum, some leaders of the largest financial institutions have voiced support for the proposal. Jaime Caruana, the chief of the BIS, stated that the most realistic way to institute a global levy would be to implement a similar levy in Europe. Moreover, at the G20’s request, the IMF is producing a study on the various ways in which the financial sector could help recoup the costs of public-sector crisis support.

On January 21, the president proposed the “Volcker Rule,” named after former Fed chairman Paul Volcker, one of the biggest proponents of Glass-Steagall-type restrictions (although his current proposal—endorsed by the president—does not call for a separation of commercial and investment banking activities). The president’s proposal would put limits on the size and scope of the U.S. banking sector in the interest of addressing risk management and conflict-of-interest concerns. According to Volcker, the rationale for limiting the size of institutions arises from the vital capital intermediation and payment system functions they provide for the real economy. The complexity that arises from the combination of these activities is reason enough to limit each institution’s size, to ensure that an individual failure would not disrupt the economy. For the same reason, he argues, leveraging the risk inherent in commercial banks’ maturity-transformation business with proprietary trading activities is not warranted and should not be backstopped by the safety net provided to ensure deposit-taking institutions’ core activities. The same reasoning applies to bank ownership of private equity and hedge funds, with conflicts of interest an additional aggravating factor.

In Dr. Roubini’s view, the new Volcker Rule is a step in the right direction. More radical reforms, like breaking up too-big-to-fail financial firms and returning to Glass-Steagall-type restrictions, that are needed to stave off asset bubbles and tame systemic risk may be politically difficult to implement, he warns.

This month, the Obama administration released its FY2011 budget, which forecasts fiscal deficits of US$1.55 trillion (10.6% of GDP) and US$1.3 trillion (8.3% of GDP) for FY2010 and FY2011 respectively. To support economic recovery in the near term, the administration plans to increase spending on several stimulus measures: extending unemployment benefits and health-care subsidies for unemployed workers, providing tax and credit incentives for small businesses to invest and hire workers, extending payroll tax cuts for the middle class and increasing funding for states, infrastructure and transportation. Meanwhile, the administration plans to begin to reduce the fiscal deficit in 2012 and bring it below 4.0% of GDP by 2014 by adopting fiscal consolidation measures and reducing the primary deficit through raising taxes on high-income households and investors and cutting spending on health care and discretionary programs.

These proposals fall short of aggressive fiscal reforms, and the fiscal deficit is likely to remain near US$1 trillion and exceed 5.0% of GDP over the next decade (and trend higher thereafter). Near-term spending on fiscal stimulus and defense will remain high at least until 2011, as Obama’s proposed three-year freeze on discretionary spending excludes defense and entitlements. A sluggish and jobless economic recovery and weaknesses in the financial and household sectors will keep revenues subdued and constrain tax hikes. Rather than yielding savings, as projected by Congress and the administration, the health-care reform legislation will burden the fiscal deficit over the next decade. Health-care mandates and subsidies will raise government spending, while cost savings from the proposed reforms will be small and accrue only in the longer term. The elimination of the “public option” might reduce fiscal costs, but the lack of it will keep insurance premiums high.

Obama simply lacks the political support to implement aggressive fiscal reforms. The Senate recently voted against Obama’s proposals on spending freezes and the establishment of a fiscal commission, whose role would be to send fiscal reform legislation to Congress that would have to be voted on or thrown out without the possibility of amendments. Moreover, if policymakers extend the 2001 and 2003 tax cuts beyond 2011, when they are scheduled to expire, the impact on the fiscal deficit and U.S. fiscal credibility would be immense. Washington has not signaled strong support for wider tax reforms, such as introducing a value-added tax (VAT).

Despite the ticking fiscal bomb, mid-term and presidential elections in November 2010 and 2012 respectively will further constrain political will to undertake necessary reforms. With sub-par economic recovery and an unemployment rate above 9.0% forecast for 2011-12, the Democrats, grappling to maintain power, are unlikely to approve spending cuts, while the Republicans, seeking to revive their prominence, will be unyielding on tax hikes. Even if Obama manages to establish a fiscal commission by executive order, Congress will be wont to reject any radical fiscal reform proposals.

18 Responses to “RGE’s Wednesday Note – Obama’s Recent Regulatory and Fiscal Proposals”

Little Saver and Subsidizer of the "financial innovation producing class"February 3rd, 2010 at 10:42 am

His waning political capital will stand in the way of achieving his fiscal, social and economic goals.Not without reason: looking back many years from now, the sad legacy of this administration will not be some vaunted healthcare reform, but the unprecedented amount of capital that shifted away from the nation’s working class to the nation’s “financial innovation producing” class. (, thatz a way to lose political capital, and rightly so.

PeterJBFebruary 3rd, 2010 at 10:52 am

Speaking of The Drugging of America”The fifth tributary that helped to create our deluge of disaster is both a cause and an effect of America’s social breakdown. This is the numbing of Americans with psychotropic drugs. In 2006, Americans, who make up approximately 6 percent of the world’s population, consumed 66 percent of the world’s supply of antidepressants. In 2002, more than 13 percent of Americans were taking Prozac alone. Prozac is one of thirty available antidepressants. Anti-anxiety drugs, such as Zoloft, are so widely prescribed that in the year 2005, the $3.1 billion sales of Zoloft exceeded the sales for Tide detergent.Many of these drugs, which are also called “cosmetic drugs” or “life-enhancing drugs,” are diagnosed for loneliness, sadness, life transitions, or concentration on task performance. They have been “normalized” through extensive direct-to-consumer advertising and marketing to doctors who are financially rewarded for recommending them to colleagues. Regulations that once restrained the widespread promotion and sales of these powerful drugs have been relaxed to the point of near nonexistence. The United States is the only Western nation that permits direct-to-consumer drug advertising. We are also the only nation without price controls on drugs. Psychiatric drugs are so ubiquitous that the pharmaceutical industry is the most profitable industry in America, and antidepressants are their most profitable products.”,_jobs,_families_and_the_american_dream?page=4″When your life sucks, instead of going out to protest, you take a pill. If you can’t afford a prescription pill, which the pill-pushers we call ‘doctors’ are all too happy to prescribe, you can buy something for your pain on the street. Are Americans anesthetized into political passivity? Removing 10 to 20 per cent of the population into a cloud of drug-induced indifference, the part of the population that contains the ‘rabble-rousers’, would be enough to stifle political protest. It sounds like a science fiction novel, but American capitalism appears to have discovered the elusive key to unlimited exploitation.” more could I possibly add?Ho hum

Average JaneFebruary 3rd, 2010 at 7:05 pm

MSNBC recently ran a documentary on the massive increase in the use of psychotropic drugs in US prisons. Billions upon billions of profit for Big Pharma in that little captive market. They actually have machines that automatically dispense the drugs because there aren’t enough pharmaceutical assistants to track them all. Some might argue this is a good thing, but I wonder, I really wonder.

11b40February 6th, 2010 at 12:53 pm

Top Ten Quotes – BRAVE NEW WORLD, Aldous Huxley2) “And that,” put in the Director sententiously, “that is the secret of happiness and virtue— liking what you’ve got to do. All conditioning aims at that: making people like their unescapable social destiny.”: The Director in chapter 1. After genetic engineering, social conditioning is the most important way for the government to enslave its people. The different caste members are conditioned to never yearn for a life other than their own. This is the second major instrument of social stability.10) “But I don’t want comfort. I want God, I want poetry, I want real danger, I want freedom, I want goodness. I want sin.”: The Savage in chapter 17. Here the Savage explains the old world reasoning. He asserts that true life requires exposure to all things, good and evil.Independent Contractor

PeterJBFebruary 3rd, 2010 at 5:16 pm

Speaking of natural tendencies and actions taken by the illiterate, unlearned, incompetent, and insolent, of the unwashed, ignorant, popular, ugly, er, “leadership, in times of need (read: call it the treachery of fascism): read Hayek’s The Road to Serfdom”To pay for this extravagance, taxes must rise and small businesses are getting hammered as a result. I would like to hope that mid-term elections will solve something, but for all their blustering, Republicans cannot step up to the plate either and make the necessary cuts.”Mish today: is easy to see that “leadership” just reject small business in times of stress and eagerly run always and a priori, to the arms of big business. Gives me warm and tinglies all over. Its just Love baby, give me a hug!Ho hum

11b40February 6th, 2010 at 1:00 pm

..or, instead of a hug, how about a tax credit for the small business for buying new equipment or hiring new employees.Never mind that the problem is making payroll. Never mind that there is no credit to buy anything new with.what a freakin’ joke.Independent Contractor.

blindmanFebruary 3rd, 2010 at 10:34 pm

@ above”This week, RGE tracked a series of events that revealed the Obama administration’s juggling act: an effort to maintain growth, tame the fiscal deficit and garner the congressional support needed to implement policy.”.comment: this administration is juggling, giving / handing the treasury over to the financial/insurance/pharmaceutical sectorand or giving away the treasury to the energy/oil and defense sector. the third ball in the juggling act is public perception concerning this agenda, as in deny, obfuscate, lie and by no means discuss the reality of the agenda, not for public consumption.occupy haiti, africa, iran, iraq, afghanistan, etc………..and then sell it all to china/themselves….etc. both parties agree.implementing any policy at all depends only on large sums ofcorporate money which the fed will make available upon request to those persons befriended by the supreme infantile womb dwellersknown as “justice”.those who go from cradle to grave without leaving the womb.keywords:construction, dwellings, halls and rooms, legacy.infrastructure, legacy commitments, mothers milk, debt,more debt, large infantile brain / head, narrow birth canal,legacy plastic and toxic waste, debt is money, more debt.more money. umbilical after-debt money.ecology, not waste.human external womb / dwelling. nest.legacy nest rotting. settled. who will pay for themistake? right.external womb in all it’s glory.pointing toward the sky / hungry in need.demanding sacrifice of man. mole ing for cave ing..womb pointing? toward the sun? ( is this a joke? ).where i come from the woman consider it acompliment when comments are overheardconcerning their “set/s” of balls. the menare confused yet nest with the best. and t.v…it’s not drugs that are causing this.maybe the food supply additives, system and quality?.more keywords: legacy ideation, natural if a corporation is a person that would mean thatit too is born with a large infantile brain and must bedelivered into a legacy nest or man/woman made externalwomb for its external security, protection and furtherdevelopment and immaturation. they need toys too..this is persons never leave the nest/womb today as the globe hasbeen harvested for nesting and nesting modification and decorationetc. and one merely re-nests, never leaving the womb. the globehas been “enwombed” or entombed. housing. spoiling the nest.. corporate excrement. debt money. vampire food. toxic topersons.but a corporation “person” has nesting and energetic and feedingneeds too and in direct competition and conflict with those requirement of life of natural persons. the credit potential,debt burden capacities are of different magnitudes and the prospects / outcome for the small debtors are poor in that theycannot enrich or pay off representatives to do their bidding..dilema. if they kill off all the people and small businesseswho will they feed on? they don’t even make for good parasites. virtually legion among legion..spiritual crisis, coming up. has happened, but realizationis coming right up..corporate persons need prisons/tombs too..

Little Saver and Subsidizer of the "financial innovation producing class"February 4th, 2010 at 3:02 am

Now, thatz another way to lose political capital, and rightly so:Obama’s $6.3 Trillion Scam Is America’s Shame: Jonathan WeilWhat’s sickening is that the government can’t afford the subsidies. Suddenly, that $8,000 tax credit for first-time homebuyers looks like a nasty teaser aimed at sucking America’s newlyweds into a giant Ponzi scheme.Nowhere to go anymore. No options left. Deceit and theft all over.

MAFebruary 4th, 2010 at 10:05 am

Anybody catch Nassim Taleb’s comment about shorting T’s??? …and the comment about Larry Summer’s role????Nouriel… where do you stand? You have affiliations with both of these guys… don’t you? Is there some sort of tension?My personal advice… DO NOT LISTEN TO TALEB!!!IS HE INSANE? Short treasuries?In essence, that’s what the repo market already does, but shorting treasuries is a potentially catastrophic recommendation! Sure, we all know rates will rise, so in theory it makes sense… but like I said last year when the TPMG placed new fines for treasury fails, there would be potential for market shortages. Going and shorting this market would in turn create real market shortages, and potentially freezing up the most liquid market in the world!!!…while at the same time, incurring a fine (EVERY DAY) that is greater percentage-wise then the spread on the rate increase. To boot, in freezing that market, you wind up increasing the value of that T since its demand increases.PLEASE, PLEASE, PLEASE someone find out more about what Taleb said, and see if there is something I am missing?From my article last year, I talked about this: specific, this is what I said:Naked Short Selling vs The US GovernmentOne has to wonder how the entire financial community was able to deny this practices existence. It is comical to see the captured regulatory agencies scurry to put in place safeguards to protect against something they swore up to 6 months ago didn’t exist.It has gone so far that the US Treasury is set to make a massive industry change on May 1st. On the 1st the TPMG (The Treasury Market Practices Group) will put into affect a sizeable charge on failed deliveries of US Treasuries. Although they may deny this as their main reason for the charge, I will be willing to stand out on a ledge and state that I believe this is a move by the treasury to essentially protect themselves against the naked Short Selling equivalent of US Treasuries. It is a move to protect the “quality” of the asset, because they can NOT afford to have these securities subject to potential manipulations. That would rock the foundation of its status as a “flight to quality” and bring about a potential collapse.Sure they may say this isn’t the case, and that they are just trying to free up liquidity, but the fact is that the broker dealers know that with rates so low, it is cheaper to fail on a delivery, rather then pay the cost of borrowing the collateral for the repos they finance themselves with. (This move by the TPMG could become dangerous as they may actually cause market shortages in the long run?)Don’t believe me??? Here are their words along with the website to check out the changes that go into effect this week:“Market participants with large short positions should make deliveries in good faith. Market participants with a particularly large short position in an issue should ensure that they are making a good faith attempt to borrow needed securities in order to make timely delivery of securities. Market participants should avoid the practice of “strategic fails”—that is, the practice of selling short a security in the repo market at or near zero percent with little expectation of being able to obtain the security to make timely delivery.”!!! This is a pretty amazing about face for the practice of Naked Short Selling that didn’t exist just six months ago!!!All the best,Miss America

PeterJBFebruary 4th, 2010 at 3:53 pm

Speaking about the high priorities and targets of US “leadership”:”In a striking admission from the Obama Administration’s top intelligence officer, Director of National Intelligence Dennis Blair announced Wednesday that the United States may target its own citizens abroad for death if it believes they are associated with terrorist groups.” has, so sadly, come to this moment.

P1AQLFebruary 4th, 2010 at 5:50 pm

MA et al,I know you’re a fan of Star Wars and I remember saying ‘May the USD be with you’Well Well Well. I did say last year Europe will get killed in this cross-fire here … Inflation? Those quaint vacation villas on Costa Del Sol will make Dubai blush and keep inflation on planet Earth.until then,you guessed it,Print First Ask Questions Later or keeping with the Star Wars acronym that MA gave me …P1AQL.Enjoy the ride!

blindmanFebruary 4th, 2010 at 5:51 pm

so nice to know, reassuring, that they are not, theybeing ( the bankershit squads financed by the “people” ), targeting forextermination the voices / people who rise up to speakthe truth. [ free speech ] . but even if they declaredthat speech could be cause for extermination that wouldnot eliminate it, free speech. it would eliminate them. i don’t knowthat this man understands that. is not , speech, something anyone can control but one case scenario.there, that word “self” again. governments and their hired helpoverinflate themselves when they act, believe or otherwise implythat they can control anything. limit and influence to degree,yes. kill and murder or eliminate in barbaric evil and deluded fashion, yes.but on the living side their power is modulatedby reality, other dynamics beyond control. as has been said”restrictive recursive” or there about..what is sad, to me, is the wholesale acceptance of homicide,murder and or other forms of systemic torture, abuse and violenceas substitutes for justice and communication. (joy, life and humor)for money advantage. who are these morons?”leadership”. they do not know what they are, what they do, whoor what will forgive it?.power has corrupted this mentality, absolutely..he is on board with the spiritual crisis agenda. a member of”leadership”. structure and function. cradle to grave..i would ask those inclined to exterminate others to stopand think. then stop forever and live..”the tongue has no bone”.it does not need one nor would a bonebe of any benefit. …..

bFebruary 4th, 2010 at 10:21 pm

Terry AllenAmarillo HighwayAlbum: Lubbock (On Everything).WellI’m a high straight in PlainviewSide bet in IdalouAn a fresh deck and New DealYeahSome call me high handAnd some call me low handBut I’m holdin’ what I am… The Wheel’CauseI’m panhandlinMan handlinPost holinHigh rollinDust Bowlin…DaddyAn I ain’t got no blood veinsjust got them four lanesOf hard…Amarillo HighwayYeahI don’t wear no StetsonBut I’m willin to bet sonThat I’m ‘ big’ Texan as you are’There’s a girl in her barefeet’Sleep on the back seatAn that trunk is full of Pearl…and Lone Star(chorus)SoGonna hop out’ta bedPop a pill in my headYeah, bust the Hub for the Golden SpreadUnder blue skiesGonna stuff my hideBehind some power glideAn get some southern fried…back in my eye..(chorus)An close I’ll ever get to heavenIs makin’ speed up ol’ 87Of that hard-ass…Amarillo Highway