This past week we have been seeing the fallout from the failure of the Supercommittee to reach any sort of agreement.
Senate Republicans and Democrats seem to agree on a one year extension of the 2% decrease in payroll taxes but could not agree on the financing. Democrats want to charge a 1.9% surcharge on income above $1,000,000 for ten years, while Republicans want to freeze the pay of federal workers for two years.
Since I last posted on Monday, the status of the December 9 agreement in Brussels has deteriorated further. I have major doubts that this agreement will significantly ease the crisis either in the short-term or the long-term.
On Friday, the seventeen Eurozone countries—and the ten other nations that comprise the EU—came together to discuss the next steps in responding to the sovereign debt crisis. The pact was agreed to by 26 of the 27 present nations—the U.K. was the only holdout.
Yesterday, Princeton Professor Emeritus Burton Malkiel wrote an op-ed in the Wall Street Journal about challenges facing bond investors looking for yield. The piece echoed much of my thinking on the issue, but I wanted to add a few more thoughts.
On Saturday, Peter Wallison of the American Enterprise Institute wrote an op-ed in the Wall Street Journal about regulators’ role in the financial crisis of 2008 and the present sovereign debt crisis. I certainly don’t agree with everything that he said, but he makes a very good point about assets that are deemed to be low-risk or risk-free under Basel or other frameworks:
A few weeks ago, I wrote about lowering the loan limits for mortgages insured by Fannie Mae and Freddie Mac. Congress, to their credit, wisely decided to restore the limits to their original, lower levels. Unfortunately, Congress decided to keep in the place the higher limits for mortgages insured by the Federal Housing Administration (FHA)—up to $729,900 in some areas.
Last week, former House Speaker Newt Gingrich unveiled details of his plan to partially privatize Social Security. His plan would allow younger workers to contribute a portion of their payroll tax obligation to a private investment account. Roughly speaking, Gingrich is signing on to the legislation from 2004 sponsored by Representative Paul Ryan (R-WI) and former Senator John Sununu (R-NH).
In not unsurprising news, the Supercommittee will shortly announce that they have failed to reach an agreement to cut $1.2 trillion from the deficit over ten years. The New York Times reports on why the twelve-member group became deadlocked:
In the end the two sides could not agree on a mix of tax increases and spending cuts and — perhaps above all — on the fate of the tax cuts originally signed by President George W. Bush, which are now scheduled to expire at the end of 2012.