Wall Street and the Secret History of Clintonomics

Buffett cozies up to Hillary Clinton, as Wall Street remembers the good times of the '90s.

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Superstar investor Warren Buffett held a fundraiser last night for Hillary Clinton in Manhattan, an event that's been interpreted by some as Wall Street's endorsement of the Democratic frontrunner. (Side note: Buffett, who called at the event for higher taxes on corporations and wealthier Americans, pointed out that he had paid a lower tax rate in 2006 than one of his office secretaries and explained how wrong that was. So why doesn't he just cut a check to Uncle Sam to make up the difference? Just wondering.) Let's assume for a second that the Big Money crowd does love Hillary. Why might that be, given that Wall Street is often assumed to be a Republican stronghold? Three reasons:

1) When it comes to politics, Wall Street is a momentum investor, and right now Hillary has Big Mo on her side as the favorite to win the Democratic nomination and the presidency.

2) Wall Street has never really felt "the love" from the Bush administration. The president's first two Treasury secretaries were an aluminum exec (Paul O'Neill) and a railroad exec (John Snow). Investment pros were probably expecting a coal exec or a rubber company man for No. 3 and may have been pleasantly surprised to get Hank Paulson of Goldman Sachs. But it was too little, too late. Plus, it's hard to think "Clinton" and "economy" without thinking of Robert Rubin, the former Goldman Sachs exec who is considered the architect of Bill Clinton's economic policies. If Hillary wins, look for her guy at Treasury to be from Wall Street.

3) Wall Street prospered under Bill Clinton and may well be hoping for another round of Clintonomics. But it's hard to say that Hillary will merely be Bill: The Sequel when it comes to economic policy. Remember, there were maybe three different versions of Clintonomics. Release 1.0 was the "Putting People First" agenda of the 1992 campaign—inspired by economist Robert Reich—that called for cutting the budget deficit in half and making massive new investment in "human capital." (It also called for a supercool bullet train across America.) This version never even made it to Inauguration Day.

Release 2.0 called for massive government intervention in the healthcare system and higher income taxes to lower the federal deficit in hopes of driving down interest rates. The healthcare plan, as is well known, imploded. But Rubin and Bill's "bond market strategy" seemed to work. Taxes went up, the deficit and interest rates went down, and the economy prospered.

Except the timing and sequence of events are all wrong. While long-term rates fell from 7.4 percent at the start of 1993 to 5.78 percent in October 1993—Bill signed his tax hike law back in August—they then headed back up, moving steadily higher until Nov. 7, 1994,when they peaked at 8.16 percent. That was almost a full point higher than before the "bond market strategy" was implemented.

But rates fell the next day, the day of the midterm election, when Republicans surprisingly took the U.S. House and Senate. That's when rates really began the long descent that Bill Clinton and Rubin had predicted. One explanation: The 1993 drop in rates happened because investors were expecting a recession. The 1994 drop was more indicative of market expectations that the new GOP Congress would get tough on spending, meaning not only lower budget deficits but a lower chance of spending-induced inflation.

Release 3.0 was the version that compromised with Republicans, cutting capital-gains taxes and creating the Roth IRA. As far as stocks go, the Dow Jones industrial average did not really begin to surge until December 2004—again, after the GOP took Congress. The Dow drifted higher, from roughly 3300 in January 2003 to 3800 in November 2004, a period when Bill Clinton had a Democratic Congress. Over the next two years—when Clinton had a GOP Congress—the Dow vaulted from 3800 to 6200. Maybe Wall Street has forgotten how well mixed government worked.

Oh, and it seems likely that if Hillary Clinton wins, she will have a Democratic Congress. Which version of Clintonomics will it prefer?

TAGS:
Clinton, Hillary
Wall Street
Buffett, Warren
Clinton, Bill

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