Clinton Appointments Show Wall Street He’s Serious About Deficit
Wall Street believes that it has little to lose and a lot to gain under President-elect Bill Clinton’s economic team, named on Thursday.
In fact, the irony of Clinton’s economic grand plan is that, while it purports to “put people first,” its successful implementation could hurt the average taxpayer while benefiting investors--at least early on.
What Wall Street sees in Clinton’s appointments, including Sen. Lloyd Bentsen as Treasury secretary, Rep. Leon Panetta as budget director and Robert E. Rubin as a key economic adviser, is a group committed to attacking the economy’s fundamental problems: too much debt and too little investment.
The markets showed little reaction to the official announcement, but then the names have been rumored for the last few weeks--during which time stocks have rallied sharply and bond yields have dropped. On Thursday, the Dow industrials slipped 11.62 points to 3,312.19, while the 30-year Treasury bond yield eased to 7.42% from 7.43% Wednesday.
Despite Thursday’s collective yawn, if the Clinton team can work with Congress to bring down the swelling federal budget deficit while boosting investment and savings and speeding economic growth, it will unquestionably provide the best possible backdrop for stock and bond investors over the next few years.
But there’s certain to be a high cost involved, and it won’t just be paid by millionaires: Wall Street believes that the nation’s middle class will pay, most probably through full taxation of Social Security benefits and cuts in other entitlement programs that now benefit the relatively well-off.
Thursday, Bentsen’s appointment in particular won praise from many big investors, though many admitted that they wanted ex-Federal Reserve Chief Paul Volcker at Treasury.
Jon Fossel, a self-described “ardent Republican” who heads the Oppenheimer mutual fund group in New York, argued that “Bentsen is the best choice. . . . He’s a big believer in savings and investment, he listens to the private sector and he’s got a lot of respect in Congress.”
As a strong supporter of heftier Individual Retirement Account deductions, Bentsen scores major points with mutual funds and brokerages that would expect to attract billions of dollars in new long-term savings from Americans through such an expanded IRA.
Meanwhile, Clinton’s choice of Rubin to head a new coordinating council on economic policy gives Wall Street a powerful voice in the White House. As co-chairman of Goldman, Sachs & Co., Rubin “has been at the head of the most successful Wall Street firm in history,” said Allen Sinai, chief economist at Boston Co.
Rubin, a wealthy Democrat of the “limousine liberal” camp, isn’t likely to fight for handouts for Wall Street interests. Nonetheless, his presence at Clinton’s side reassures big stock and bond investors that their perspective will be heard in the formation of a long-term economic program.
And in that regard, no other issue terrifies big investors (and many small investors) like the federal budget deficit and the $4-trillion federal debt that accumulated deficits have created. Wall Street believes that it’s now or never--either the debt stops mushrooming, or every other issue is moot. Ross Perot’s presidential campaign was built on that point; Clinton knows Perot is watching.
With the appointment of Panetta as budget chief, Clinton gives the deficit-weary another reason to feel encouraged. Panetta has campaigned tirelessly to slash the deficit, which hit a record $290 billion in the fiscal year ended Sept. 30 and has been below $200 billion only thrice in the last 10 years.
On Sept. 25, Panetta warned that “deficits are gobbling up private savings and reducing the private investment that is needed to improve living standards for our children. If we fail to change our ways, the damage will be enormous.”
But how will Clinton and his team control the deficit while embarking on new spending programs to rebuild the nation’s infrastructure and train American workers for the 21st Century?
There’s only one answer, many big investors believe: Clinton will have to insist that well-off members of the middle class take less from the public dole. If you want to cut the budget, “that’s where the money is,” said Robert Brusca, economist at Nikko Securities in New York. The rich alone can’t do it.
Full taxation of Social Security benefits is a virtual certainty, many economists believe, despite the uproar such a move will cause among the powerful lobby of older Americans.
And forget about a middle-class tax cut, most Wall Streeters say: If Clinton doesn’t yet understand that the nation can’t afford it, his new economic team will persuade him.
Does that mean Clinton’s team is basically made up of Republican wolves in Democratic sheepskins? On the contrary, Clinton’s appointments are merely a recognition that the nation has reached the end of its borrow-and-spend binge, experts say. We don’t have any choice but to get serious about the future.
If that’s also a big relief--or even a boon--for financial markets, so much the better.
