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Hennessey: George W. Bush Is Smarter Than You
| April 24, 2013 | 1:21 pm | Keith Hennessey | No comments

Published April 24, 2013

The new George W. Bush Presidential Center is being dedicated this week. This seems like a good time to bust a longstanding myth about our former President, my former boss.

I teach a class at Stanford Business School titled “Financial Crises in the U.S. and Europe.” During one class session while explaining the events of September 2008, I kept referring to the efforts of the threesome of Hank Paulson, Ben Bernanke, and Tim Geithner, who were joined at the hip in dealing with firm-specific problems as they arose.

One of my students asked “How involved was President Bush with what was going on?” I smiled and responded, “What you really mean is, ‘Was President Bush smart enough to understand what was going on,’ right?”

The class went dead silent. Everyone knew that this was the true meaning of the question. Kudos to that student for asking the hard question and for framing it so politely. I had stripped away that decorum and exposed the raw nerve.

I looked hard at the 60 MBA students and said “President Bush is smarter than almost every one of you.”

More silence.

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Hennessey: Responding to Mr. Carney
| January 31, 2013 | 1:15 pm | Keith Hennessey | No comments

Published for keithhennessey.com, January 30, 2013

I’d like to thank White House Press Secretary Jay Carney for giving me so much material to work with in his press briefing today.

MR. CARNEY: Well, there’s a lot in your question, so let me go first to the broader fact, which is that we have seen consistent job growth over almost three years.

Nope. Job growth began in March 2010 and was strong for March, April, and May. We then lost net jobs for four months. We have had continuous job growth since October 2010. That is two and a quarter years, which is not “almost three.” (Source: BLS)

If you start measuring in March 2010, job growth has averaged +141K/month. If you start measuring in October 2010, job growth has averaged +153K/month. If we were at full employment those numbers would be fine because you need around +125-150K/month to keep up with population growth. Given continued high unemployment those numbers fall far short of the job growth rate we need to return rapidly to full employment. We’re generally doing a bit better than treading water, but not much.

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Hennessey: Raise the debt limit and cut spending
| January 15, 2013 | 5:57 pm | Keith Hennessey | No comments

I’d like to explain why I think “payment prioritization” proposals are bad ideas, why and how Congressional Republicans should support a debt limit increase, and why they need to be smart about how they push for spending cuts.

Payment prioritization proposals

As background, in my last post I explained the difference between default and technical default:

Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.

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Hennessey: A modest debt limit strategy
| January 7, 2013 | 5:40 pm | Keith Hennessey | No comments

Published for keithhennessey.com, January 7th, 2013

I agree with Speaker Boehner (in this excellent interview in today’s WSJ) that spending cutters’ principal legislative leverage comes from the March sequester and continuing resolution deadlines rather than from the upcoming need for a legislative debt limit increase. I disagree with those who argue that Congressional Republicans must therefore simply pass a clean debt limit increase as the President requests. I’d like to present an alternate debt limit strategy, one which is both responsible policy and potentially effective in making modest progress in cutting government spending.

My substantive view is that the debt limit must be legislatively increased. It is highly irresponsible to pursue a legislative strategy that places the full faith and credit of the U.S. government at risk. Failing to pay debt obligations is at least an order of magnitude more damaging than a “government shutdown” induced by failing to extend a continuing resolution. Having lived through the 1995 government shutdown, I wouldn’t want to wish that on anyone, but I’d happily risk another shutdown rather than roll the dice on the debt limit.

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Hennessey: What kind of negotiator is President Obama?
| December 14, 2012 | 3:49 pm | Keith Hennessey | No comments

Published for www.keithhennessey.com, December 12, 2012

President Obama’s behavior over the past month is consistent with three different models, and I cannot figure out which one applies.

In model 1 the President is a risk-taker. He is a competent and effective negotiator who is willing to risk a recession and the ensuing political blame game in January because he thinks both will help him achieve his fiscal policy goals. I don’t think the President is willing to take such a risk, but Michael Barone makes a convincing case otherwise. You decide.

In model 1 the President has leverage because he is willing to go where Congressional Republicans are not (over the cliff).

In model 1 the President would, in the last few days of December, compare Speaker Boehner’s last offer with what the President thinks he can get after a few weeks of January blame game, then decide whether or not to accept the offer or take us over the cliff.

In model 2 the President is bluffing quite effectively. He is risk averse, and he is also a savvy, patient, and skilled negotiator. Privately he knows that he cannot allow a no-bill scenario because a recession would seriously damage his second term. But he has bluffed Congressional Republicans into thinking he is willing to take that risk, and this bluff has given him tremendous leverage. His initial offer was outrageous but designed for maximum press benefit over the next few weeks. He will demonstrate to a willingly gullible press corps that he is reasonable by showing the significant negotiating concessions he has made (from an absurd starting point) in an attempt to get a deal with those extreeeeme Republicans.

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Hennessey: A third option changes the negotiation
| December 12, 2012 | 12:45 pm | Keith Hennessey | No comments

Published for www.keithhennessey.com, December 11, 2012

The conventional wisdom on the fiscal cliff is that there are two options: (1) an Obama-Boehner deal; or (2) no deal, in which case there is no legislation before the end of the year and we “go off the fiscal cliff.” Even those who acknowledge the possibility of other legislative paths appear to treat the Obama-Boehner negotiation as if it were the only alternative to a failure to legislate.

I won’t rehash my argument that the President is no more willing to risk a no deal scenario than Republicans, and therefore that he and his advisors are bluffing when they say they are willing to “go over the cliff” if a new bill is not to their liking. But after talking to Republican friends on Capitol Hill, I am confident that I have convinced no one of this point. It appears many key Republicans believe that a no-bill scenario is unacceptable and must be avoided at any cost.

If enough Republican Members of Congress believe this, and if the President knows they believe this, then Speaker Boehner has literally zero leverage in his negotiations. The President can dictate his terms because Republicans think he is willing to walk away from a bad deal and they are not.

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Hennessey: Understanding the President’s fiscal cliff offer
| December 3, 2012 | 4:57 pm | Keith Hennessey | No comments

Published for www.keithhennessey.com, December 3, 2012

I am going to describe the President’s proposal to Republican Congressional leaders, then react to the most important parts of it.  Secretary Geithner offered this proposal last Thursday.

This is a post for intermediate to advanced readers. Except where noted, all large numbers are for the next ten years.

President Obama’s opening bid

Items in bold are being labeled by the Administration as non-negotiable. Brackets show where I am unsure what they are proposing.

Arithmetic

This is how the Administration describes it.  I think this arithmetic is absurd and explain why below.

  • $4 trillion of deficit reduction relative to a current policy baseline;
    • $1 trillion comes from the discretionary spending caps enacted in the Budget Control Act of 2011;
    • $1 trillion comes from lowering the spending caps on Overseas Contingency Operations (aka Afghanistan and the remaining forces in Iraq);
    • $400 B comes from unspecified savings in mandatory spending; and
    • $1.6 T comes from tax increases.

Taxes

  • Raise top two income tax rates permanently;
  • Extend all other tax rates, credits, and related income tax provisions permanently;
  • Tax dividend income as ordinary income;
  • Estate tax: $3.6M exemption, 45% rate – These are the parameters that were in place in 2009.
  • Capital gains rate increases to 20%;
  • Extend the Payroll tax credit;
  • Extend bonus depreciation for business investment;
  • Permanently extend the Alternative Minimum Tax;
  • Permanently extend a package of routinely expiring tax provisions, mostly for businesses, known colloquially as tax extenders.

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Hennessey: Time to Call the President’s Budget Bluff
| December 3, 2012 | 10:13 am | Keith Hennessey | No comments

Published for The Wall Street Journal, December 2, 2012

Flush with the adrenaline rush of his election victory, President Obama insists that Congress must now agree not only to raise taxes on the “rich,” but also to adopt his previously ignored full budget. The president demands a $1.6 trillion tax increase over the next decade. He maintains that higher revenues must come from marginal-rate increases but offers no policy rationale. He wants to treat $900 billion in spending cuts he agreed to in 2011 (as part of the Budget Control Act) as if they now count on his ledger as new cuts. He says that he will consider Medicare cuts and tax reform in the future, maybe.

On the other hand, Mr. Obama says reductions in ObamaCare spending are out of the question, and Congress must now agree to at least $50 billion in new stimulus spending next year. The debt limit must be permanently increased without accompanying spending cuts.

By contrast, House Speaker John Boehner and Senate Minority Leader Mitch McConnell have offered on behalf of Republicans a significant concession in an attempt to close the negotiating gap. Mr. Boehner and Mr. McConnell propose to accept higher taxes on the rich as long as government spending is cut significantly and incentives to work and invest are not weakened. That way, higher taxes and entitlement-spending cuts would reduce future deficits, not finance even bigger government as the president proposes.

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Hennessey: More on the President’s veto bluff
| November 30, 2012 | 8:57 am | Keith Hennessey | No comments

Published for www.keithhennessey.com, November 28, 2012

Yesterday I argued that the President is bluffing on his veto threat. Today I want to respond to some great feedback from friends and readers. Warning: discussions of negotiating strategy and tactics can get a little dense.

1.  I agree that Senate Democrats would likely block any bill that the President would veto. This means the veto threat is important principally to reinforce Leader Reid’s efforts to hold his Democrats together as a unified bloc.

But if I’m right that the President thinks he cannot afford to risk a recession, then the President needs a new law. Whether a bill dies in the Senate or as a result of his veto, in either case no law –> fiscal cliff –> recession –> severe damage to the rest of the President’s agenda. My hypothesis is that the President is unwilling to take that risk, so he needs the House and Senate to pass a bill he can sign. I think my argument holds whether the veto would be actual or merely a tool to reinforce his allies stopping a bill in the Senate.

2.  I agree that, were it not for the recession risk, many Democrats, possibly including the President, would think that no new law was a good fiscal policy outcome. Yes, the President and almost all Congressional Democrats say they want to extend current tax rates for the non-rich.  But if all tax rates go up, future deficits will be $5.4 trillion lower.  If the sequester is allowed to bind, deficits would be reduced by another $1.2 trillion over the next decade. This outcome, of no new law, would give the President a lot more fiscal flexibility.  The deficit and debt problem would be far from solved, but he would have more room to propose new spending that I’m guessing he wants.

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Hennessey: The President is bluffing
| November 28, 2012 | 4:48 pm | Keith Hennessey | No comments

Published for www.keithhennessey.com, November 27, 2012

I think the President is bluffing on his veto threat.

Conventional wisdom: To achieve his desired fiscal policy outcome (big tax rate increases on the rich), the President is willing to risk tax increases on all income tax filers.  He is also willing to risk the political blame for middle class Americans paying higher taxes because he thinks he can shift most of the political blame onto Republicans.  He is therefore willing to veto a bill he doesn’t like and bear the consequences of having no bill, if that’s what is needed to gain negotiating leverage.  His veto threat is credible.

This conventional wisdom makes three key assumptions.

  1. The President’s top economic policy priority is his fiscalpolicy goal (raising taxes on the rich).
  2. In a veto / no bill / blame game scenario, the President can shift most of the political blame to Republicans.
  3. He will make his veto decision on these two bases: fiscal policy and relative political blame.

Key flaw in the conventional wisdom:  The President’s veto decision is not about tax increases or political blame; it’s about causing a recession in 2013.

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