March 26, 2009

Economic Outlook: Let the squabbling begin

U.S. Treasury Secretary Tim Geithner is scheduled to outline his version of regulatory reform Thursday before the a House of Representatives committee.

Observers say the battle lines will be sketched out but Geithner has few details to impart at this point. Part of the strategy, however, is to tackle institutions deemed too big to fail, such as American International Group Inc., which strayed from its profitable insurance business and found itself mired in subprime mortgage losses. Part of the strategy will be aimed at preventing a second Bernard Madoff from breaking the backs of investors in a scheme Charles Ponzi could never have imagined in his wildest dreams, given the get-rich-quick scam that bears his name has now met up with the computer age.

It is likely Geithner will ask for regulation of hedge funds, private equity funds and venture capital, which represent private capital involving wealthy investors, the wealthy in general and pension funds, The New York Times reported.

It remains to be seen how much of a fight these industries will put up to stave off government oversight and which government agency will be handed the new role of systemic risk regulator, the Times said.

The reaction already in is mixed, running from those who would appreciate a return to less chaotic times and those who believe existing regulations are sufficient.

I'm already heavily regulated, hedge fund manager Leon Cooperman told the Times, pointing out the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve, among others, monitor his business.

The Obama administration, however, has two audiences to attend to -- one at home and one in London, where the Group of 20 nations meet April 2 for a summit.

European leaders have blanched at Washington's call for increased stimulus spending to shore up demand and Geithner's latest move, announcing a public and private partnership to relieve banks of toxic assets received a blast of cold rhetoric from Czech Prime Minister Mirek Topolanek. He talks about a large stimulus campaign by Americans. All of these steps and their permanency is a way to hell, Topolanek said.

While the regulatory squabbling begins in earnest, Asian markets turned in an upbeat day, in spite of Japanese exports dropping 49.4 percent in February, compared to the same month a year ago.

The Nikkei 225 index gained 156 points Thursday, while the Hang Seng index in Hong Kong rose 3.57 percent to 14,108. The broader Topic rose 1.02 percent, while the S&P/ASX rose 1.03 percent.

The European scene was mixed with gains and losses at less than 1 percent. The DAX 30 in Frankfurt was up 0.65 percent; the CAC 40 in Paris was down 0.15 percent. London's FTSE 100 gained 0.21 percent. The DJStoxx 600 was down 0.16 percent.

While investors noticed some upside data recently, revised U.S. gross domestic product figures for the fourth quarter are expected Thursday, with estimates predicting the contraction firmed to a minus 6.5 percent to minus 6.7 percent. Now, it appears investors have hit a crossroads. That is to say from here on in it will depends on which is scarier, the recession or regulatory reform.