By now, most of the United States is familiar with the Jim Bunning story and how he held up a vote on jobless benefits. Bunning was pilloried by Democrats and the Huffington post for stalling funds from going to help unemployed people. But did it? The Chicago Tribune carries an interesting story that asks due, “Longer jobless benefits cause longer unemployment?

“As of mid-2008, unemployment benefits ran out after 26 weeks. Under two presidential administrations and a more-than-willing Congress, however, they kept growing and growing.First, they expanded by 20 weeks, then another 13, then 20 more and then 13 more. One additional week got added to the first 13 to make 14. Finally, another six got tacked on….Add it up, and that’s 99 weeks of unemployment benefits available to Illinois residents who qualify. Other states have different rules, but many also run to 99 weeks at the maximum.”

“Given the rotten economy, it’s easy to imagine why politicians keep pumping quarters into the jukebox. It takes time to get a job, so the long duration of benefits is not a sign of deliberate malingering. But those government checks come with an unwanted side effect, especially for workers at the low end of the economic food chain. They go a long way toward explaining why 40 percent of jobless Americans have been out of work for at least 27 weeks, the highest level since the government started keeping score in the 1940s.”

“Those programs subsidize unemployment,” explained Robert Shimer, economics professor at the University of Chicago. “There could be good reasons to do it, but we should be clear on the cost. It has a pretty substantial impact.” Shimer estimates that the current level of benefits probably accounts for 1 to 1.5 percentage points to the 9.7 percent national unemployment rate.

If true, it’s a fascinating behavioral dilemma for politicians.

If they cut the benefits (like Bunning asked), then they run the risk of being seen as Potter-like bad guys with no compassion for the unemployed. If they don’t cut the benefits, the jobless rate stays artificially high heading into the fall mid-term elections and the voters turn them out. Political expectations effect economic decisions. While Democrats may believe that they have a Faustian choice over health care, they will be staring down another one with unemployment.

These decisions matter for the markets. Consider this scenario for the 2nd half of the year: the economy continues to improve and begins to create jobs; the government is hiring census workers and will also be creating jobs (temp, but jobs); and Congress stops extending the jobless benefits which drops the headline unemployment rate 1 full point. In turn, this will prompt the Fed to act sooner than the market is anticipating now and begin to raise rates to take out the massive monetary stimulus.

Under this scenario, we could get the unemployment rate to drop below 8% before the end of 2010 and the Fed Funds rate to be above 1%. While I give this a 20% probability, it’s vastly different from what the market is anticipating and therefore provides an opportunity.

This situation underscores exactly how difficult it will be for anyone in D.C. to address the massive federal budget deficit and massive increase in US debt. All Bunning was doing was asking the Senate and Congress to follow their own rules of pay-go or finding a way to pay for something before their spent on it. Pay-go was just enacted and now it was just overrode.

Bunning is not an isolated political voice. Yes, he is retiring and this allowed him the leeway to address a very unpopular fiscal stance. But he wouldn’t have stood up unless there was support. Think two words that begin with the letter T: Texas and Tea. In the Republican Texas primary for governor, incumbent Rick Perry fought off big name Sen. Kay Bailey Hutchinson with a strong anti-Washington stance. “This election was about hard-working Texans sending a simple, compelling message to Washington: quit spending all the money, stop trying to take over our lives and our businesses,” Perry said according to Reuters.

The Tea Party in the United States has been influential in the Brown victory in Massachusetts and with Perry’s primary victory in Texas. According the Tea Party Patriot’s webiste, they believe in three things: fiscal responsibility, constitutionally limited government, and free markets. According to a the US Tea party’s website, the goals are even simpler: taxes are too high and the tax code is too complicated. According to Tea Party Nation’s website, they “….believe in Limited Government, Free Speech, the 2nd Amendment, our Military, Secure Borders and our Country!”

It’s difficult to ascertain which group officially speaks for the movement or whether any of these are the official group. I’m not promoting the groups here, but merely showing that they are uniformly for limited government.

As an investor, you may be wondering why this is salient to you? The father of modern economics supported a limited role for government. Mark Skousen writes in “The Making of Modern Economics”, Adam Smith believed that, “Government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression.” The point is that the farther a government gets away from this limited role, the more that government strays from the ideal path that will ensure the fastest path towards the creation of “universal opulence” or wealth for workers.

Currently, fiscal duress due to government expansion is the over-riding theme of the financial markets and will be for years to come. Can governments pay for the massive global stimulus that they ponied up for arresting the global recession? For Japan, it’s been the theme for two decades. For Greece, it’s a theme with intense focus and has brought difficult decisions to cut spending and public pay. With Bunning/Brown/Perry, the US is now joining the debate.

How this issue is handled will decide whether the country can more closely follow Adam Smith’s prescription for growth and wealth creation or move farther away from it.

In turn, this will make lending for small to medium sized companies less available as banks set aside the additional funds. This means that the Obama administration’s plan to take $30 billion of TARP funds to lend to small/medium size firms is necessary to assist these companies. I’m beginning to see a shape take form here and it’s a circle.

Given the current trouble Congress is experiencing getting a financial regulatory bill out of the Senate, this underscores some of the confusion about arcane financial products and confusion over how to address their risks (if any) towards the financial markets. FYI, there has been many predictions from the Senate banking committee that they will be producing a bill soon…….and then nothing happens. Serious disagreements continue to crop up and lack of agreement continues to plague the process. I expect a bill soon, but……

There is no agreement yet on the Consumer Financial Protection Agency or a similar regulatory body that focuses on consumer financial products.

There is slowly developing a Too-Big-To-Fail oversight body. The latest is to have a council housed at the US Treasury with the Fed nominating an institution and the council deciding if it will be wound down.

There is very little discussion on derivatives language and whether all derivatives will be thrust onto an exchange.

The Volcker Rule splitting proprietary trading out of banks looks like it’s dead from a legislative standpoint, but will be part of a regulator’s guidelines.

Last Friday, the six hours of solid debate didn’t lead to much momentum on that bill and took Congressional oxygen away from FRR. The biggest threat to a FRR bill remains whether the Senate goes to reconciliation on health care and creates a scorched earth policy towards other legislation.

House Budget
FISCAL 2011 BUDGET: TREASURY DEPARTMENT
10 a.m. Feb. 24, 210 Cannon Bldg.
Full Committee Hearing
House Budget Committee (Chairman Spratt, D-S.C.) will hold a hearing on the president’s proposed fiscal 2011 budget for the Treasury Department.
Witnesses Scheduled: Timothy F. Geithner, secretary of the Treasury

House Financial Services
HUMPHREY-HAWKINS MONETARY POLICY REPORT
10 a.m. Feb. 24, 2128 Rayburn Bldg.
House Financial Services Committee (Chairman Frank, D-Mass.) will hold a hearing on the Humphrey-Hawkins Semiannual Monetary Policy Report, current economic conditions, and the outlook for the financial sector and the broader economy.
Witnesses Scheduled: Ben S. Bernanke - chairman, Board of Governors, Federal Reserve System

House Oversight & Government Reform
TOYOTA RECALL
11 a.m. Feb. 24, 2154 Rayburn Bldg.
House Oversight and Government Reform Committee (Chairman Towns, D-N.Y.) will hold a hearing titled “Toyota Gas Pedals: Is the Public At Risk?”
Panel: Ray LaHood, secretary of Transportation; David Strickland, administrator, National Highway Traffic Safety Administration
Panel: Akio Toyoda, president and CEO, Toyota Motor Corp.; Yoshimi Inaba, president and CEO, Toyota Motor North America Inc.
Panel: Joan Claybrook, president emeritus, Public Citizen, and former administrator, National Highway Traffic Safety Administration; Clarence M. Ditlow, executive director, Center for Auto Safety; Fe Niosco Lastrella, lost family members in a car accident involving a Toyota vehicle; Kevin Haggerty, experienced sudden unintended acceleration in a Toyota vehicle

The budget story is a negative for the markets and Geithner will be grilled over the assumptions, projections, and exclusions to the 2011 Obama blueprint for spending. The monetary policy report will be mixed for the markets as Bernanke walks the fine line of talking optimistic and supporting his rate hike all the while justifying the verbal barrage by Fed members saying the rate hike was not going to mean additional rate hikes soon. Finally, the Toyota situation is just a negative, but it may be past its sell date for impact.

Summing it up, the Bernanke testimony will outweigh Geithner/Toyoda (CEO). Given the big drop in consumer confidence yesterday and the lack of jobs, the members of the US House will be all over Bernake and it should be confrontational with Kanjorski, Waters, and Paul all getting the shots in on the chairman.

a. Lyle Lovett

b. The current Bachelor

c. Frodo

d. JFK

e. Aragorn

f. a & d

g. c & e

Answer below…..

Vogueing: The answer today’s quiz is f. In this story, Vogue states that Geithner is, “A lithe and athletic 48 years old, Geithner, who was named one of the 100 most beautiful people of 2009 by People magazine (it may have helped that his brother works for the publication), has the kind of looks that can go either way: Half an inch one way he’s John F. Kennedy; half an inch the other he’s Lyle Lovett.” With this kind of reporting, is it any wonder that Geithner doesn’t want to act out the Onion’s story about sitting on top of the Capitol dome?

When it comes to Greece, deny, deny, deny!: Today, we had an official denial from not only the European, but also Germany on the report yesterday of a E20-25 billion bailout fund for Greece. The report in Der Spiegel yesterday sounded more like a trial balloon that was today pricked by authorities. It underscores that the situation is still in flux, but at least it’s being discussed. Athens pledged to take new steps should they be needed on the deficit reduction program. The FT continues their string of decidedly bearish EU stories with a mash-up of how southern Europe has threatened the integrity of the entire European unity for 60 years. Coupled with a weaker than expected German IFO business climate number, the Euro sank on the news.

Toyotathon: Today, we get the first of three scheduled congressional hearings on Toyota. The House Energy and Commerce Committee led by Henry Waxman (D-Cal.) gets the first crack at asking tough questions to a Toyota executive. While there certainly is a problem with some of the cars as witnessed by the massive recall, one has to wonder about the optics of these appearances. Since the United States owns 61% of General Motors, the conflict of interest is a serious question for those in Congress asking the questions. Of course, many members have lots of experience with this subject and I’m sure that will assist them with their line of inquiry and keeping the discussion above politics. It better. Toyota has a large US presence and it would be a disservice to auto workers in Kentucky, Indiana, Alabama and Mississippi to have this get out of control.

The next story came from Der Spiegle which stated that the EU/Germany may be willing to supply up to E25 billion in aid. ” The amount each country would contribute would be calculated according to its relative position in the European Central Bank, Der Spiegel explains. Germany would therefore contribute nearly 20 percent of the potential aid package, the equivalent of up to five billion euros, which would be made up in part of loans and guarantees.” Both stories had a salutary effect and the Euro rallied. While the Greece situation has been a major concern for the European Union, it now appears that the early part of the crisis has passed.

India like Brazil?: Bloomberg reports today that India’s credit rating may be raised from junk if Finance Minister Pranab Mukherjee provides a comprehensive plan to roll back fiscal stimulus and cut the budget deficit this week, Moody’s Investors Service said. “If we think the exit path is well articulated and well executed, the local currency rating could be upgraded,” Aninda Mitra, a Singapore-based sovereign analyst at Moody’s, said in a telephone interview on Feb. 19. India’s long-term local currency debt is placed at Ba2 by Moody’s, two levels below the investment grade and at par with Armenia and Turkey. Mukherjee has an opportunity to narrow the budget shortfall as accelerating economic growth boosts tax revenue and a stronger political mandate after last year’s elections paves the way to resume asset sales. Rating changes have less impact on India than other countries like Greece, which borrow more from abroad. India’s foreign borrowings make up only about 4 percent of government debt compared with 83 percent for Greece, according to Citigroup Inc.” While the last point may be true, I believe you could potentially get a Brazil-like impact on FDI into India with the ratings change.

Besides making the 2010 mid-term elections a bit tougher for Democrats to retain their large majorities, the comments Bayh made on CBS’s Early Show were particularly damaging. “If I could create one job in the private sector by helping to grow a business, that would be one more than Congress has created in the last six months,” he said. This will stand in stark contrast to the announcements we get today on President Obama’s 2009 $787 billion stimulus program.

Today marks the one year anniversary of the signing of the law creating the programs. It is the major piece of legislation that the harmonized Congress and White House have completed. Health care, cap and trade, and financial regulatory reform are still not ready to be done and may not see action ahead of the mid-term elections. While the Associated Press states that the stimulus bill has saved/created 3.5 million jobs, the President’s own economic team metrics showed that the program would stop unemployment at 8%. Perhaps it would’ve had the full amount of the stimulus been deployed. Estimates now show that only about half has made it out the door.

Bayh’s comments on job creation will stand in sharp contrast to whatever President Obama and Democratic leadership state today to celebrate the one year anniversary. The major problem with the stimulus plan is that is not nearly as effective as it could’ve been. The $170 billion in tax cuts for the middle income earners is a great example of the problems.

Research shows very clearly that if recipients believe the cuts are temporary, they will save the money or pay down debt. If the recipients believe the cuts are permanent, they will spend the money. Given that President Obama just stated that all solutions to the US debt problems are on the table including a middle class tax hike, one has to believe that tax cut recipients don’t believe the cuts are permanent. Therefore, the cuts did not have their intended maximum positive effect and yet they contributed their full weight towards expanding the deficit.

Today, the NYT runs an article on how the gridlock is negatively impacting the nation’s ability to deal with a massive budget deficit and massive increase in public debt. Due to being shut out of the legislative process from health care to the stimulus bill, the Republicans are not cooperating on any additional measures to deal with the deficits in an election year. In fairness to the Democrats, the long term problems for the debt reside in entitlement programs that were expanded (Prescription Drug Bill) under Bush. The major concern is that solution put forward by the party in power solely focuses on raising taxes and raising taxes on the upper income earners.

This is also the major concern Conservatives have over the creation of a debt panel that President Obama is going to sign on Thursday. The solution will primarily focus on raising taxes and will exclude the truly important aspect of cutting the entitlement programs and cutting spending overall. It is the way of Japan. A poor man can’t spend his way to prosperity nor can a government tax it’s way to fiscal probity.

Until the President leads Congress on serious deficit reduction plans that include cuts to entitlement programs, all the articles about the disease of gridlock will be true and negative for the markets.