Up on the Tightrope

President Obama's announcement of Elizabeth Warren to fill a newly-created advisory position (to himself, and to Treasury Secretary Tim Geithner)on consumer financial products regulation suggests Obama is trying to walk a fine line between doing the right thing for Main Street and annoying Wall Street.

The questions this announcement raises are many: Who will be the nominee for the permanent position as head of the CFPA (Consumer Financial Protection Agency, set up by the recent financial regulatory legislation)? Why isn't it going to be Warren (it's possible she doesn't want it)? Why didn't he just give her a recess appointment? Can she perform as though she were the agency head in the meantime?

I don't know about any of these, though I have been one to call for her nomination, and devil take those who might block her. This seems a bit too cute to me.

The next Main St. vs. Wall St. tightrope walk will be the question of tax policy, and particularly any role Obama might take, now or in the lame-duck session after the election, to try to settle the logjam on any legislation to extend the Bushite tax cuts.

Today on CNBC they were heavily promoting a town hall meeting with the President they will be telecasting exclusively on Monday, and asking their various guests to name one question they would ask him. The best answer I heard was from one of their frequent contributors (I forget her name)1 , which was: What about the capital gains and dividends rate cuts due to expire?

This, to me, is the key question and could be the key to unlock the door. What I've seen from some economists suggests that of the various forms of tax cuts, the capital gains one would be the form that would return the greatest number of new investment in the economy (and thus, new jobs), and that retaining the lower rates on qualifying dividends would do a lot for (some) stocks' values, and that rises in stock values do the most to stimulate spending on the high end (not increases in income; those windfalls go into savings).

Obama should lay down a hard line on restoring tax cuts for high income earners--that he will veto the bill, if necessary--but encourage the "right types" of income through temporary restoration of tax cuts on capital gains and dividends. And, of course, the middle class tax cut, which will go straight into spending and reviving the economy.

Wall Street will be satisfied, if not thrilled. Main Street will be less than outraged. Those insisting on tax cuts for the rich will be high and dry, with no hope of getting them approved. Obama & Co. might even then pick up that couple of Republican/Blue Dog votes which will be required to get the bill through. And wouldn't that be better than just having a talking point for the campaign?


1 She's a funds investor, possibly in tech?, a bit on the wide side, and notably pessimistic about most everything, even her holdings.