Wednesday, July 24, 2013 - The Showdown

The Showdown

by Sinclair Noe

DOW – 25 = 15,542
SPX – 6 = 1685
NAS + 0.33 = 3579

10 YR YLD + .07 = 2.58%
OIL + .09 = 107.00
GOLD – 26.10 = 1322.60
SILV - .34 = 20.25

No new records today. No milk and cookies, just the crumbs.

 A federal bankruptcy judge has cleared the way for Detroit’s bankruptcy case to go forward without legal challenges. The decision by Judge Steven Rhodes of United States Bankruptcy Court freezes all litigation against the city during the bankruptcy process and consolidates state-level legal challenges to Detroit’s Chapter 9 filing into the federal bankruptcy case.

The federal bankruptcy court has “exclusive jurisdiction” over the case, he said, adding, “There is no case law that holds otherwise.”

The judge was attempting to put to rest a legal spat that began almost immediately after Detroit filed for BK last week. On Friday a state judge ruled that the filing violated the state Constitution, which protects the pensions of retired public employees. The city has been expected to seek reductions in pensions in bankruptcy court as part of its broader efforts to reduce Detroit’s estimated $18 billion in debts and other obligations.

Today, Judge Rhodes approved a motion by the city’s emergency financial manager, Kevyn Orr, to freeze all litigation against the city during the bankruptcy process. The move effectively gives Judge Rhodes the authority to rule on the issues raised by retired public employees regarding their pensions.

Remember Meredith Whitney? She's the financial analyst who correctly predicted that Citigroup was in trouble, right before the financial crisis. In an op-ed in the Financial Times she says, "The aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents."

Whitney thinks this is the first in that many many municipal defaults she's been predicting for the past 3 years. She went on 60 Minutes in 2010 and said the muni market was going to hell in a handbasket, and she caused a minor freakout, which never came to pass. She is right when she points out that many municipalities are struggling to balance their obligations to current and former employees, bondholders and public services and that something will have to give. And if Detroit can wipe out underfunded pensions, there will be other cities that will consider similar action, but it's not so easy.

Many states prohibit municipalities from going the BK route; they must be truly insolvent; they need to exhaust other ways to pay off debt. And then there is the simple idea that the economy is getting better. It's not getting great, but it hasn't fallen into the abyss, and that means state and local revenues are getting better.

And besides, Detroit could solve this whole problem in a heartbeat, if they could just get the profits from Goldman Sachs' aluminum warehousing operations. Hmmm. Detroit's problems surely run deep. But beneath its fiscal problems, and all the hemming and hawing about them, lie the seeds of rebirth for the city and the broader metro region. Since the economic crisis, and perhaps somewhat before it, the first signs of recovery and revitalization, modest as they may be, are finally starting to surface. And housing is so cheap, we could all just go up there and buy a former auto plant and convert it into a summer cottage; snowbirds in reverse.

A NBC/Murdoch Street Journal poll released today finds that Americans disapprove of Congress. We really, really don't like Congress; 83% disapprove of the job Congress is doing; that's a record level. Just 12% approve of the job Congress is doing, and 57% say they would replace every member of Congress if they could. The poll also finds that the president's approval rating has dropped to 45 percent, down from 48 percent last month.

I don't get it; I don't understand. Who are these 12% who approve of Congress? Does that 12% represent the “Friends and Family Plan” or is it the lobbyists who have already paid for their Congress person?

What's behind this dissatisfaction? Let's keep it simple; it's the economy. That's not everything but it is the 800 pound gorilla. And so today, President Obama started talking about the economy. You'll hear more in coming days and weeks. There will be a debate to define an economic policy. And the debate started in Galesburg, Illinois at Knox College. Galesburg is a small town with a little over 30,000 residents and a median income of just over $17,000. In 2004, the Maytag plant closed down; the unemployment rate is still a little above 8%.

Obama went on the offensive, well aware that it is just a matter of time before Congress re-emerges from it's summer slowdown and slips into full-fledged dysfunctional overdrive. He took credit for helping strengthen the economy, while acknowledging that “we're not there yet”; and he went on the attack against Republicans in the House of Representatives for engaging in “an endless parade of distractions, political posturing and phony scandals.” He said, “Washington has taken its eye off the ball,” and it needs to stop.

And then he addressed two issues that will dominate the debate in Washington in coming months – the debt ceiling and funding the government. Obama said: “We’ve seen a sizable group of Republican lawmakers suggest they wouldn’t vote to pay the very bills that Congress rang up — a fiasco that harmed a fragile recovery in 2011, and one we can’t afford to repeat.”

Over in the House, meanwhile, Speaker John Boehner has said that he will not "raise the debt ceiling without real cuts in spending," a mantra that preceded a similar showdown in 2011. Boehner has alternatively said he would not allow the country to default -- making it hard to gauge how serious a threat this truly is -- but there are loads of lawmakers who are perfectly willing to gamble with default.

Obama clearly learned from earlier missteps, when the administration declared victory on the recovery prematurely. He focused his address not on acknowledging a modest recovery but trying to argue for why his policies on spending, health care, immigration and even raising the minimum wage would help drive a more broadly shared recovery.

He spent a lot of time talking about how wages have grown for top earners but not the middle class, and rising stock prices do not translate to widely shared prosperity. And this is really where the economic debate is headed, an attempt to define the true origins of prosperity. And the debate will be between the trickle down theory and the middle out economics.

Economic policy choices may seem complex but they boil down to a simple question: whether what's best for a capitalist economy is an ever-increasing concentration of wealth at the top or a thriving and growing middle class. That's why arguments about the debt, sequestration, trade policy, tax reform, and fiscal stimulus are really distractions – along with a lot of what passes for news on any given day.

A modern understanding of economics leads to the conclusion that prosperity is the result of ongoing interaction between consumers and businesses. The middle-out theory tries to improve the interaction by creating conditions that allow both middle class consumers and the businesses that depend on them to prosper and to provide mutual benefit in a kind of virtuous cycle. This means that a prosperous economy revolves not around a tiny number of the very rich but around a great and growing number of middle-class consumers and small businesspeople.

Middle-out economics has several important advantages over trickle-down. One is reality: This is how complex, adaptive systems like economies in fact thrive. A second is politics: Middle-class voters will naturally prefer a story that puts them in the center, rather than at the margins. And the third is intuition: We know in our gut that we're all better off when we're all better off. We have seen how inequality does not lift all boats. We don't seek equal results, just equality of opportunity.

The implication of trickle down is that prosperity trickles down form the top and so it's only the people at the top who matter; but most people realize that people in the middle and bottom also matter. We are connected on many different levels, indivisible.

And while it is tempting for businesses to only court the top, the reality is that they need the middle and the bottom; they need more customers, not just a couple of wealthy customers. We need more Americans who have purchasing power, education, health security, and access to capital participating in the economy; whether as consumers or as innovators, which is actually just another way of saying small business people. In other words, we need the economy operating at full capacity. If we hope to achieve our full economic potential we need to get everyone involved.

We need more consumers, yes, because that drives demand and when we have demand, business people will respond to demand, and that in turn, will encourage more innovators, more ideas, more competition, and of course, more jobs. Economic growth happens when together we invest in the education and health care and infrastructure and research that provide the foundation for the entrepreneurial energy of the private sector.

Obama plans to expound on his ideas in speeches across the country in the weeks ahead. His address today in Galesburg did not include major new policy proposals, but new ideas are expected to be sprinkled in future remarks. Already, the Republicans are denouncing the speech for a lack of specifics, and today the president denounced them for a lack of specifics, saying: “You can't just be against something. You've got to be for something.”

But the specifics are not the real story; the real story is the showdown between trickle down and middle out.