Because It Doesn’t Make Sense

The Presidents approval ratings (RCP poll average) have dropped by 47.5 points since inauguration.  Left and Right scramble to either identify specifics or justify them.  While arguments are, in some cases, well made on both sides there is a bottom line.  It is the same bottom line that has always been the case; the smell test.  

The smell test is just another name for common sense.  In the case of current policies and rhetoric the public is saying; “it just doesn’t make sense, I smell something that’s not right here.”    

It doesn’t make sense to the point that intelligent well educated folks who would typically eschew conspiracy theories are turning to them as the only rational answer to what they’ve seen over the past eighteen months.  Manchurian Candidate is mentioned, but only in the company of trusted friends with the promise that the discussion will go no further.  “Who is behind this?”  True or not, this is what you get when it “just doesn’t make sense.”

What doesn’t make sense?

Despite the uncertainty in the business community the President continues to lash out at “unscrupulous and underhanded businesses” who have “threatened to bring down the entire financial system.”  “Small business is the answer”; there has, however, been no point of significant support for small business.  As small business looks forward to higher taxes, burdensome new reporting requirements and more regulation they refuse to take the risks that create or expand small businesses.  They are hunkered down and they plan to stay there.  Mr. Geithner, this weekend, says the right thing apparently unaware of the President’s comments earlier in the week; “we need to make the transition now, to a recovery led by private investment.”  Mr. G, flash for the great unwashed; there is not going to be a surge in private investment, at least not as of January 1, 2011!  Investors are voting with their dollars and they will continue to do so because all of this just doesn’t make sense to them economically.

Big business is sitting on billions in cash reserves.  The message to the President is straightforward; “It doesn’t make sense and we’re not going to play by these rules in this environment.”  The financial middle finger is clearly in evidence from the private sector. 

Financial regulation legislation does not include Fanny and Freddy.  Why; “The housing market is too complicated and sensitive right now” according to Mr. Geithner.  Common sense cannot avoid Fanny and Freddy as a significant part of the financial collapse.  Unsure of that contention, check out Investor’s Business Daily’s reporting on Fanny and Freddy. 

Home ownership is at its lowest level in a decade, due in large part to foreclosed mortgages granted to folks who could not afford them.  Fanny and Freddy served as the specific conduit for those ill fated mortgages powered by the Community Reinvestment Act and intense political pressures, yet Fanny and Freddy are under no significant Congressional scrutiny or efforts at re-regulation?           

None of this makes sense to the Business Roundtable, the Chamber of Commerce or the National Federation of Independent Business.   

The predominant justification in support of the Stimulus Package is “it could have been worse.”  The proof is questionable but the opinions are strong.  The current “run it up the flagpole” exercise is to determine if the idea of another $100 – $200 billion in unpaid stimulus spending can fly.  Making sense yet?  No, it does not; one reason why consumer confidence has dipped to its lowest level since February. 

There is a $500 billion tax hike coming due to the sunset provisions of the Bush Tax cuts.  Government reports issued today indicate that 30 million middle class families will be affected.  The CBO also warns today, once again, that our debt is unsustainable.  There is no obvious effort in Congress or the White House to address it.  Predict collapse and then let it happen?  Does not make sense?

Fox Business reports that the SEC is going to be exempted from Freedom of Information laws.  How does that make sense in our new age of transparency?

To most, tax policy determines certain behaviors.  Senator Kerry’s behavior related to his new yacht would be a fair example of how taxes alter behavior; individuals with resources behave in a similar fashion.  What happens? With capital gains set to go from 15% to 20% investors will cash out over a 5% margin change! They will also follow the current pattern and keep their gains on the sidelines. How much capital comes out of the system and what is the impact on the overall economy?  We may not know for sure but we do know for sure it can’t be good. 

A 5% change in the tax burden is a highly significant number to investors, especially when it can be easily avoided.  Deals can fail to past muster over 5%.  Logic would demand that, in light of current circumstances, keeping capital in the system makes sense; especially when all you have to do is leave tax rates alone.  Historically when capital gains rates go up, government revenues go down.  Money will wait for more favorable circumstances before moving around again.  Larry Kudlow describes this effect as “the Sword of Damocles” hanging over the stock market.

Rich Lowrey reports on an academic paper by Christine Romer and her husband.  Mr. & Mrs. Romer report; “Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent. The effect is highly significant.”  Ms. Romer works in the White House, the fact that no one appears to be listening doesn’t make sense.

What about jobs you may ask?  Raghavan Mayur in IBD reports that the length of time out of work has soared to 35 weeks on average.  That is two times greater than the previous peak for any economic downturn on record.  He further reports that nearly half of households consider their situation to be “job sensitive”.  Job sensitive is defined as being fearful of being laid off or looking for work. 

Nearly 50% of households in fear of their employment situation, and yet optimistic rhetoric continues from the White House and Congress confident in the telling that we see “signs of recovery”.

Does that make sense?