The Finance 202: Harvey complicates Trump’s border wall plans – Washington Post

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There is a version of events in which a hurricane wreaking historic devastation on a major American city calls bitterly divided leaders to a common purpose. In that version of events, the urgency of the crisis not only rallies bipartisan support behind an expensive recovery operation, it also compels policymakers to set aside disputes over measures to keep the government open and lift the debt ceiling that they must pass next month.

We are not living in that version of events. 

Even as what remains of Harvey regathered strength Monday to wallop southeastern Texas again, President Trump re-upped his threat to shut down the government if lawmakers deny him funding for a Mexican border wall. “It has nothing to do with it,” Trump said of the need to secure funding for Harvey relief. “I think this is separate.”

My colleagues Mike DeBonis and Damian Paletta put that presidential brushoff in context: 

Trump’s comments, delivered at a White House news conference, illustrate the political minefield he will navigate in September as he tries to draw support for disaster recovery funds but wages a bitter fight with lawmakers from both parties about whether U.S. taxpayers should finance the creation of a wall that he has long promised Mexico would fund…

Harvey’s devastation represents a new challenge for the White House and Congress, requiring lawmakers to approve billions of dollars in recovery spending even though they haven’t agreed on much else this year. It will test whether Trump can overcome deep divisions within his own party on fiscal matters to prioritize aid, and whether he can suspend his adversarial governing style and even postpone his own agenda, notably an overhaul of the tax code. 

It isn’t clear yet how congressional Republicans, for their part, will try to wend their way through the thicket of competing demands next month. At first blush, GOP leaders could use disaster relief as an inducement for a package that also includes a government funding extension and a debt-ceiling hike (or a short-term suspension). It would give them cover to stiff-arm the fiscal hawks in the hardline Freedom Caucus — who weren’t likely to vote for either anyway — and instead gather votes they need from Democrats. 
 

But Trump’s border wall demand ties that strategy in knots. Stan Collender, a federal budget expert now with Qorvis, makes the case in a Forbes piece this morning:

Trump may be thinking that adding the funds for his wall to a bill with Harvey relief will make it easier for him to get the dollars he wants. After all, would congressional Democrats, who so far have indicated they’re adamantly against the wall, dare oppose a bill if funding for the wall and Harvey relief aid were combined?

But House and Senate Democrats almost certainly see this coming and are likely to announce very soon — perhaps even this week — that they insist that the hurricane relief funds be in a standalone bill rather than the [spending measure] and that this bill not include anything other than aid for Harvey victims. As a sweetener, they could ask that a Harvey relief bill be considered now rather than by the end of the month so that the aid can start flowing immediately.

That would put the White House in a political bind. If the president signed the standalone relief bill, he might be giving up what he considers to be the best chance at getting the funds for his wall. If he vetoed it, he would be delaying aid to Texas, Louisiana and everywhere else affected by the storm and causing a great deal of voter and congressional GOP angst.

One plugged-in Republican lobbyist tells me some Trump advisers are trying to prevail on the president to postpone the battle over the border wall until the end of the year. “There’s an effort being made to convince him a short-term extension isn’t the place to make the fight,” he says. That is, in a bill that holds government spending steady through the end of the year, money for the wall would stick out like a sore thumb. But in December, when lawmakers are haggling over funding levels across the board in an omnibus spending package, the wall could be just one more chit with which to bargain. 

Will Trump listen? “I don’t make any predictions about what this president will do,” this lobbyist says. 
 

There are still other issues in the mix. The National Flood Insurance Program expires at the end of the month, and reauthorizing it has become newly pressing in Harvey’s wake. The program is nearly $25 billion in debt, and like the federal government, it has its own borrowing limit — of roughly $30 billion. Covered losses will almost certainly exceed the program’s remaining borrowing authority. As The Post’s Phillip Bump points out, Hurricane Katrina left NFIP on the hook for $18 billion, and losses from 2012’s Hurricane Sandy neared $10 billion. 

Lawmakers aren’t anywhere near a consensus on a long-term renewal of the program. House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) has been pushing for a wholesale overhaul that would shift more of the burden onto policyholders, but he’s encountered bipartisan resistance in the chamber; and the Senate Banking Committee has yet to mark up its own version. 

Steve Ellis, vice president of Taxpayers for Common Sense, which has pushed for reforms to the program, says lawmakers will likely approve a short-term extension. “Even if Harvey hadn’t happened, it’d be hard to see them getting it done on time,” he says. “Now, people are going to say they need to see what the impacts are on the program.” Insurance industry lobbyists expect such an extension will also hike the program’s borrowing authority. 

Most immediately, though, those in Harvey’s path will receive disaster relief funds administered by the Federal Emergency Management Agency. In a Monday note to clients, Morgan Stanley pointed out that that the program had $3.3 billion on hand at the end of last week. Because the Treasury is running so close to empty, if the feds burn through that reserve, and then Congress appropriates more money for disaster relief before lifting the federal debt ceiling, it could accelerate the deadline for acting to avert a debt default. The bank notes that outcome is unlikely, since a debt ceiling hike and extra disaster relief funding are likely to move in the same package. But it presents one more headache for policymakers as a messy month gets even messier. 

And it’s unclear what Trump will ultimately do. Here’s disaster historian Scott Gabriel Knowles:

MARKET MOVERS

The bill for Harvey’s damage is likely to run into the tens of billions of dollars. That’s just the start of the economic consequences, which can be tricky to measure. The Wall Street Journal’s Josh Zumbrun: “Even after the immediate threat from Hurricane Harvey has passed and the floodwaters receded, the Texas Gulf Coast faces tens of billions of dollars in property damage, bottlenecks at some of the nation’s largest oil refineries, and work disruptions possibly for millions of workers. ‘The damage will likely be much higher than most recent hurricanes have been,’ said Adam Kamins, senior economist at Moody’s Analytics. There are ‘very high levels of housing density where some of the most severe flooding is taking place. Because of that you have very high expected property and vehicle damage.’ Moreover, the storm could impact the economy nationwide due to the large oil refining presence in the Gulf Coast. Refiners in Corpus Christi, Lake Charles and Houston have about 30% of the nation’s oil refining capacity.”

Some economists believe such a disaster can end up as a net positive for the economy, because of the stimulative effect of the recovery spending. Conor Dougherty and Nelson D. Schwartz of the New York Times: “Economists say the region is likely to recover quickly and may even experience a bump in growth from rebuilding… The economic impact of the storm will not be clear with any degree of accuracy for a while. But given Houston’s commercial importance — and its perch along a well-trod hurricane zone — economists and others have long taken it for granted that an epic storm would hit the region eventually, so have a head start on the numbers. About two years ago, Ray Perryman, the head of an economic analysis firm, looked at the hypothetical economic damage that would be wrought if storms of various sizes and magnitudes hit coastal Texas. The estimates ranged from around $11 billion to $80 billion — and the earliest estimates suggest this disaster will be on the upper end of that range.”

 

Vice President Pence says the federal government has the money it needs to fund Harvey relief efforts. “In speaking with FEMA officials, we truly believe that we have the reserves to address the financial burden of this crisis,” Pence told a Houston television station on Monday. Roll Call’s John Bennett: “But the VP left open the door that the administration might have to ask lawmakers for more aid dollars. ‘Before I was vice president, I was a governor,’ the former Indiana chief executive said. ‘Before that, I was in the Congress. And we’re very confident that the Congress of the United States is going to be there to provide the resources necessary.'”

Oops: Trump earlier this month threw out an Obama administration requirement that federal, state and local agencies work to enhance flood protection for buildings and other infrastructure. HuffPost’s Marina Fang:  “Trump’s rollback of the Federal Flood Risk Management Standard was part of his executive order billed as a plan to streamline infrastructure projects. He signed the order earlier this month at Trump Tower in New York, minutes before the fiery press conference during which he blamed ‘both sides’ for the deadly violence in Charlottesville, Virginia, incited by a white supremacist rally. Flanked by cabinet officials and aides, Trump heralded the order as part of his administration’s efforts to rid industry of what he sees as onerous and unnecessary regulation. He called such rules ‘a massive, self-inflicted wound on our country.'”

 

Did Janet L. Yellen talk herself out of her job on Friday? The rapidly-emerging consensus among central bank watchers holds that the Fed chair’s forthright defense of Obama-era financial regulation, delivered at the annual summit in Jackson Hole, Wyo., all but seals her fate as a single-termer.

CNBC’s Jeff Cox: “She said the crisis ‘demanded action’ and said the reforms ‘have made the system safer.’ That, however, is just the opposite of what Trump has been preaching. The president has long bemoaned the handcuffs he sees Dodd-Frank and other reforms have put on banking, and is unlikely to want a Fed chair at odds with his thinking… PredictIt, an online betting site that allows members to “invest” on the outcomes of various events, put [National Economic Council Chair Gary] Cohn out in front Monday. The current betting line translates to a 28 percent chance that the former Goldman Sachs chief operating officer gets the post, compared to 24 percent for Yellen. Former Fed Governor Kevin Warsh is emerging as a dark horse, with an 18 percent chance that got a boost in Monday wagering.”

Others aren’t willing to rate Cohn’s chances so highly, especially after his own comments Friday to the Financial Times criticizing Trump’s handling the Charlottesville aftermath. To boot, as the Post reported Friday, he was overheard earlier in the week at a restaurant on Long Island’s North Fork loudly complaining about Trump’s hapless management style.

Cap Alpha’s Ian Katz, who’s been voicing skepticism of Cohn’s chances for weeks, is now even more bearish. Here was his assessment, in a Sunday note to clients: “We think the possibility that either Janet L. Yellen or Gary Cohn will be the next Federal Reserve chair has been reduced. Three weeks ago we estimated a roughly 60 percent chance that the next Fed chair will be someone other than Yellen or Cohn. We’ll now bump that up to 65-70 percent… Trump might be willing to allow Cohn to publicly express his displeasure. He might even understand it. But that’s not the same as rewarding Cohn for it with the Fed nomination.”

Bond traders don’t see a distinction worth making between Yellen and Cohn, at least when it comes to monetary policy. Bloomberg’s Brian Chappatta: “Whether Trump nominates the former Goldman Sachs Group Inc. president or reappoints Yellen, investors overseeing more than $1 trillion in fixed-income assets see little change in the Fed’s course: a drawn-out process of trimming its balance sheet and raising interest rates. And they’re putting money on that view, with positions that are at least neutral — if not outright bullish — on the $14.1 trillion Treasuries market.”

In a Blast From a Financial Crisis Past, Synthetic CDOs Are Back

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WSJ

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