Tuesday, November 20, 2012

Bernanke Warns About Fiscal Cliff

     In a speech in New York today Bernanke called the recovery "disappointingly slow" but spoke of no new stimulus. He then chided Congress about the fiscal cliff:

     "Rather than meet expectations for more central bank easing, Bernanke instead again took Congress to task for leading the nation close to a dire fiscal situation that could cause another recession."

     "Bernanke has been preaching against the series of spending cuts and tax increases that will take place automatically in 2013, and he delivered yet another warning of what he has called the "fiscal cliff."

    "The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery — indeed, by the reckoning of the Congressional Budget Office and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession," Bernanke said, according to prepared remarks.
     The immediate impact of Bernanke's remarks was  a quick stock sell-off.  I get that Bernanke feels like he has to do this. But it's clear that we'd rather have no immediate deal than a bad one that cuts taxes for the rich again-ie, letting the top rates for the rich continue. This is not something that has to be done immediately-it could wait into next year.
     Bernanke may have said nothing today as he wants Congress to take it seriously. It's clear however that he won't tale off QE3 until the recovery picks up steam:
     "Given the headwinds facing the US economy, including problems relating to US fiscal policy, it is hard to imagine a sustained acceleration in growth before the middle of 2013," economists at Nomura Securities said in an analysis. "That means that MBS purchases will likely go on until the third quarter of 2013."
     I can't help but wonder if some of the alarmism you hear about the cliff is mostly coming  from the rich. The rich apparently are very concerned about it:
     Super-Rich Super Panic: Rich Americans likely have the most on the line as we near the fiscal cliff, the New York Times notes. Their tax rates would rise under the President's plan or if lawmakers don’t reach a deal."

     "Some are taking action in advance. The Walton family, which founded Walmart, may save as much $180 million in taxes thanks to the company’s decision to push up its dividend payout to December from January so investors can count the income for this year, according to The New York Times. If Obama and Congress fail to reach a deal this year the tax rate on dividend income could more than double."

      "But as The NYT notes in a separate article, under Obama’s plan, rich is defined rather broadly. It could mean the super-wealthy Waltons or an individual or small business owner making more than $200,000 per year."

      "Meanwhile, corporations also stand to lose: More than $150 billion over 10 years in tax breaks, according to the Financial Times. Some business leaders say they would graciously agree to help America by giving up their corporate tax breaks so as long as they come with more complete corporate tax reform next year."

      "Still, it’s likely what business leaders want the most is for lawmakers to reach a solution. Stock indexes rose to their best day in two months on Monday on optimism that lawmakers would agree to a deal, according to the Wall Street Journal. There’s at least one CEO out there claims he’s willing to give up tax breaks for a solution, NASDAQ head Robert Greifeld said politicians need to worry less about “winning” and admitted that “broadening the tax base” may be necessary to get the necessary deal done."
     See this just makes me suspicious that this is all about the rich not wanting their taxes raised. If it's just about getting a deal done that's fine. Though Obama and the Dems are rightly skeptical about this mania for "tax reform" in the form of closing loopholes.
      Despite the rather melodramatic talk I remain convinced that the fiscal cliff is more a curb or even a speedbump. A bad deal is much worst than no deal on January 1.

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