After a stunning loss in the Massachusetts Senate race and loss of the critical 60-40 split in the US Senate, President Barack Obama did not wait long to change tactics and go on the offensive.
Yesterday's bank plan announcementis a fascinating turn in the political discussion. While the details are still a bit sketchy, the rhetoric is not. The speech had a direct negative impact on the equity markets as the S&P 500 dropped 1.89% and the financial sector dropped 2.93%.
While I (and others) believe the agenda of the White House will be pulled more mainstream due to the loss, Reuters John Kemp advocates otherwise. He writes, "In the next few weeks, the administration will disappoint many of its supporters on the left by abandoning ambitious elements of its healthcare and climate programme, as well as card-check.
But the president cannot afford to seem weak or be "triangulating" towards the centre."
Kemp says, "The unabashed populism of the bank plan enables him to shift attention from healthcare, dominate the political conversation for a while, and provides useful cover for dropping other parts of his domestic agenda. It puts the opposition Republicans in an exquisite dilemma. With their 41st vote, Senate Republicans now have the power to block the proposals. But if they do, Obama and his Democratic allies will campaign against them as friends of Wall Street and its unpopular bailouts. If Republicans agree to go along with the curbs, Obama wins a significant and popular victory."
According to Reuters, President Obama's own Treasury Secretary voiced concerns about using the Volcker rule for reducing the size of banks. "Geithner is concerned that the proposed limits on big banks' trading and size could impact U.S. firms' global competitiveness, the sources said, speaking anonymously because Geithner has not spoken publicly about his reservations. He also has concerns that the limits do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said."
Last night on PBS's NewsHour, Geithner said that the proposed measures were in the works for weeks and were not driven by political considerations. ""What it does is try to ensure that we limit risk-taking, the kind of risks that could threaten the stability of the system in the future." This question of how to resolve "Too-Big-To-Fail" is critical for the financial system and was a critical factor in how the financial panic erupted in 2008.
In a word, uncertainty. In February of 2008, Bear Stearns was married to JP Morgan . In September, Lehman was allowed to fail. Markets hate uncertainty and rush for the exits until they can regain confidence. Yesterday was a great example of this. However, business leaders also struggle with uncertainty. They react by delaying projects, delaying financing for those projects, and delaying hiring for those projects.
With the announced plan on banks, the President is shifting the focus again of the Congress and the tax writing committees away from some critical areas. Think of the estate tax, tax extenders, and most importantly what to do about the Bush tax cuts. This further fuels uncertainty for business and now for individuals. It's extremely difficult for a company to decide whether to buy a piece of equipment if the don't know what the depreciation schedule will be. It's extremely difficult for an individual to decide whether to buy a new washer&dryer or a new car if they don't know what their taxes will be.....or if they will have a job.
On January 27th, the President will deliver his state of the union address. On February 1st, he'll deliver his priorities for the budget for the coming year. The markets, business, and individuals will be looking for clarity and certainty in policy for the new year. If Obama can't deliver, then he runs the risk of stalling the recovery and putting additional downward pressure on the equity markets.
- What To Expect From Obama's State of Union
- Obama Bank Tax Pits Bankers Against Taxpayers
- Kudlow: Are Republicans Listening to the Scott Brown Message?
Andrew B. Busch is Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.