Obama’s Recession Fixes: Helping or Hurting?

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NEW YORK (TheStreet) -- The Obama administration's words are speaking louder than its actions when it comes to boosting business activity and stimulating job growth.

This week, the president scored a major political win by pushing yet another stimulus bill through a spend-weary Congress. The goal: Using $42 billion in tax and loan incentives to spur banks to lend and businesses to grow and hire.

But the bill comes at a bad time for success.

Populist rhetoric has heated up ahead of midterm elections, creating a culture where businesses must cloak their success. Meanwhile, the legislative agenda has been working against the notions of free-market capitalism that entrepreneurs tend to embrace.

Established business leaders who could most help President Obama's economic agenda are fed up with the "fat cat" soubriquets he has hurled in their direction. They're also unsure how sweeping regulatory changes - from health care to energy to the financial markets to tax policy - stand to impact their businesses and customers.

"It's clear that the range of Washington policy risks is dampening the business activity," says David Malpass, economist and president of Encima Global, who has served in senior roles at the U.S. State Department and U.S. Treasury departments. "Companies are hesitant to go to the bank because they don't want to be turned down for a loan. They are hesitant to hire a new worker because of potential health care liability. They're hesitant to put in their aging parents' money into their business because the after-tax return as tax rates go up won't be worth it."

Malpass argues that while the small-business bill is meant to help the little guys on Main Street, its passage actually stands to hurt economic growth. He thinks Obama's policy goals have cost corporate America more, restrained hiring, hampered lending and sapped confidence from the already-edgy investor community.

"It's another harmful bill because it gives the private sector the clear proof that Washington intends to control every aspect of credit flows, income flows and job flows," says Malpass. "We've got Washington controlling autos, mortgages, finance, health care and now small businesses."

Not everyone agrees with that view - there's a strong debate over the root cause of the recent economic pause.

Some lenders, economists and observers insist that activity has slowed because there's simply not enough demand. Others place the blame squarely on the uncertainty coming from Capitol Hill.

The truth is: It's a mixture of both. Yet a change in tone from the White House - which sets the agenda - would help.

"The loan officer is not thinking about Dodd-Frank necessarily," says Heath Tarbert, former special counsel at the Senate Banking Committee who now heads Weil, Gotshal & Manges' Financial Regulatory Reform Working Group. "To some extent though, it does filter down. When the strategic vision at the top is blurry, ultimately that is going to find its way down to the bottom."

The current uncertainty stems from two of Democrats' recent legislative coups, and another few that are coming down the pike.

In March, Congress passed a sweeping health-care bill that sought to lower costs and expand coverage for more Americans. Yet it also stands to increase costs dramatically for corporate America. Although there's no consensus on just how much, several blue-chip companies have announced multi-million-dollar write-downs related to the reform measure, while McDonald's (Stock Quote: MCD) said this week that it will halt its existing health-care coverage for 30,000 hourly employees.

A few months later, Congress passed another momentous reform measure: Dodd-Frank Wall Street Reform and Consumer Protection Act. Again, there's no precise estimate for how much money the bill will sap from Wall Street's coiffers. The particulars still need to be hammered out by a sprawling group of regulatory agencies in the coming years, some of which haven't even been developed yet.

But the Dodd-Frank bill is sure to crimp profits in the near-term for large banks that relied heavily on consumer fees or certain kinds of market activities. Bank of America (Stock Quote: BAC) has already provided stunning estimates of write-downs and revenue curtailments. Wells Fargo (Stock Quote: WFC) and JPMorgan Chase (Stock Quote: JPM) have also outlined some costs and challenges, as have Goldman Sachs (Stock Quote: GS) and Morgan Stanley (Stock Quote: MS).

"Coming out of financial reform, people had wanted more certainty in the market, knowing exactly what the rules of the game were going to be," says Edward Mills, financial-policy analyst at FBR Capital Markets. "But in many ways, the passage of that bill started a whole new period of uncertainty. Even once we have the regulations written, we don't know how the director of the Consumer Financial Protection Board will one day wake up and decide to regulate."

The legislative challenges for the business lobby don't end there.

After birthing two giant reform bills, Congress pushed off another huge item on the agenda - energy and climate change - til next year. Whatever comes of that bill will hit a wide array of industries: Oil, coal, natural gas and alternative-energy companies; airlines, automakers and other major consumers of that fuel; as well as big carbon emitters like the so-called "smokestack" utility sector.

Additionally, Congress just started the dialogue on Fannie Mae and Freddie Mac, with the debate expected to continue through 2011. The administration is set to produce a proposal for long-term housing-finance reform in January. The result stands to have enormous effects on borrowers, investors and lenders who are exposed to the mortgage business.

Another big item is tax policy. Obama and his advisers have been pushing lawmakers to repeal Bush-era tax cuts - which lapse at year-end - for the wealthy. To right the budget, Democrats were also looking for tax hikes on capital gains and dividends.

Congress opted to push off the vote til after midterm elections. But the uncertainty over taxes has caused much consternation among investors, analysts and financial advisers trying to plan year-end portfolio moves.

"Three months out for the end of the year, we don't know what cap gains is going to be next year, what dividends are going to be or what personal income rates are," says Mills.

With several more issues in the pipeline for next year, and lots of kinks to work out of existing regulation, it's also uncertain how long the economic gridlock will last. Former Ginnie Mae president Joe Murin places most of the blame on the president. Murin says the White House "is at the epicenter of the uncertainty" and needs to change its approach toward the business community.

"It's almost more important for the administration to punish and take away than it is for them to reward," says Murin, who now runs a D.C.-based consulting firm, The Collingwood Group. "Success is almost a dirty word now in our society."

But it seems the president may be starting to get the message. Business leaders have piled on criticism in recent weeks, adding to the discontent among the jobless, foreclosed-upon masses. As a string of Obama's top economic advisers - mainly academic wonks - have departed, everyone's watching to see whether the president will insert someone with a little more business savvy into the mix.

"Tone does matter," says Mills, "and I think that they are working on that."

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