Liz Peek

President Obama:  We Need a Clear Path Forward

Liz | 02/26 at 05:17 PM


Place your bets, ladies and gentlemen; red, black, odds, evens – what will it be? Is that how you’re looking at investing these days? You’re not alone, and you’re not crazy. Consider the massive unknowns facing markets: Is the economy headed for a double dip? Will health-care legislation cause relentless tax increases? Will China’s real-estate bubble pop? Will the Volcker rule cause massive restructuring of banks? Will taxes rise on capital gains? Will the muni market suffer its first big default? Will foreigners finally say “enough!” to our deluge of Treasuries? Is the Greek virus likely to spread? Will inflation roar out of nowhere and smother our monstrous fiscal debts? 

These are just a few of the anxieties muddying markets today – Iran didn’t even make the list. It is a tough time to place a bet, which is why the stock market is seesawing up and down, and generating puny volume on the upside. It is also a reason that small businesses are not hiring. There’s no conviction, and reasonably so. The Obama team continues to promote unpopular far-reaching programs – most especially the dreaded health-care bill – all the while ignoring dramatically clear signals from voters. Though supposedly concerned about unemployment, they continue to foster regulations and policies that the business community abhors. It is an anxious time. 

Remember, though, that it is when we feel most confident that we are often the most clueless, and vice versa. While the subprime mortgage contagion bloomed, most of us were proudly toting up the fast-rising value of our homes and borrowing money against that newfound asset. As banks loaded up on toxic CDOs and stock prices hit new highs in 2007, we were happily focused on Paris Hilton’s stay in the slammer, and Michael Vick’s unappetizing relationship with dogs. In short, we weren’t paying attention.

Today, we are focused. Top investors and business leaders, just like us normal people, are looking for answers. Many tuned in earlier this week to an unusual debate, courtesy of economics powerhouse ISI Group. Nouriel Roubini, aka Dr. Doom, faced off against a more optimistic Ed Hyman, Wall Street’s top economist for the past several decades. Roubini continues to earn his nickname, forecasting an “anemic recovery” for the U.S. and most of the developed world, mainly because the de-leveraging that he and many others consider essential to economic health is not taking place. Why? While the private sector is paying down debt, governments around the world are racing in the opposite direction.

In his view, “runaway deficits” will inevitably lead to higher long-term interest rates and, finally, inflation. In the U.S., he is worried that some two million homes on the brink of foreclosure will prevent a rebound in housing, that China will not be able to continue functioning as the Eastern Engine that Could, that regional banks still face speed bumps because of commercial real-estate failures and ultimately that it’s tough to see a rollicking economy when the consumer is still on the sidelines.

Ed Hyman paints a somewhat rosier picture. He forecasts a moderate recovery, pointing to the 800-plus stimulus measures enacted around the world since the recession took hold, and to numerous data points, such as car sales in China jumping from 6 to 14 million units. In the U.S., profits are up, credit markets have stabilized, and unemployment appears to have. Technology companies are enjoying a pickup in demand, and the index of leading indices in the U.S. is at the highest level since 1983.

As they compared visions of our economic future, the two economists agreed on this: Developed countries will indeed have to pay the piper for their huge fiscal interventions, sooner (Roubini’s view) or later (Hyman’s take). Neither is projecting a downturn in 2010 or 2011, but while Hyman forecasts growth of 4% this year, Roubini is targeting 2% or less. Neither bodes well for job growth, or for consumer spending.

After the call, I asked Hyman what odds he gives to a second downdraft in the economy – the infamous “double dip.” He thinks it unlikely, maybe a “two in ten” shot. “The weight of evidence is positive,” says Hyman. On the other hand, he says that an enduring lack of credit, and uncertainty about many of the issues noted earlier, is retarding progress among small businesses. He says, “Credit is available – all you want if you don’t need it” – that is, not for start-ups or small companies. 

It is not, however, all about credit. Hyman points out that the sentiment survey conducted by the National Federation of Independent Businesses continues to reflect widespread pessimism. According to the most recent sounding, 19% of NFIB members were still cutting jobs, while 9% were hiring. Uncertainty about health care, about declining home values (many entrepreneurs borrow against their homes for their initial credit line) and about labor regulations have clobbered the sector, and produced a stalemate on new hiring.

Susan Eckerly from the NFIB issued a statement about the health-care summit, saying, “Small businesses aren’t interested in political theater … They need reforms that lower their health-care costs. And none of the bills under discussion do that.” Her grammar may not be perfect, but the message is clear: The need for real reform is not being addressed.

Just today, The New York Times reported that the Obama administration is expected to use its massive buying power to “prod private companies to improve wages and benefits for millions of workers.” This is the kind of program that benefits labor unions, but enrages the business community, and that sucks the air out of the recently passed Jobs Bill. Giving companies a short-term tax credit to encourage hiring on the one hand and mandating higher pay on the other hand makes no sense, and for sure adds to the prevailing uncertainty. 

Right now this country needs clearheaded leadership, providing reassurance to those who hire and invest. To quote Dan Danner, president of the NFIB, “It appears that Washington still doesn’t get it.” He reports what his members want from Washington: “Keep taxes low, ease the regulatory burdens (we) face every day, and create an environment in which small businesses can thrive.” This is not political posturing; this is what real business owners think. He quotes one member as saying, “Leave us alone and we will take care of creating jobs.” Is anyone listening?


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