Wall Street doubts merits of stimulus

Not everyone on Wall Street thinks the stimulus package Congress and President-elect Obama are constructing will solve the economy’s ills.

While many think a combination of tax cuts and spending will spur the economy at a time when consumers and businesses are keeping a tight grip on their cash, others are preparing for another plunge in markets.

{mosads}“I think there’s still a big split here,” said Brian Gardner, a former aide on Capitol Hill who now offers analysis at Keefe, Bruyette & Woods. Some investors think “the stimulus package is not getting at the fundamental problems of the economy,” Gardner said, particularly the housing problem at the center of the crisis.

Axle Merk, the portfolio manager of Merk Investments, sees Federal Reserve actions to keep interest rates low as “propping up a broken system” and questions the wisdom of providing incentives for consumers to spend on mortgages and cars when they should be saving.

“I think as this thing progresses, they’re going to get frustrated,” he said of Washington policymakers. “Nothing will work out as planned.”

Douglas Roberts, the founder and chief investment strategist at ChannelCapitalResearch, said talk of a 6,000 Dow Jones average has been bandied about among some bears. He expects market rallies as Obama enjoys a honeymoon with Congress and Wall Street, but says all honeymoons end.

Gardner emphasized it’s a minority view that things will get that bearish.

{mospagebreak}Reid lays down gauntlet on financial rescue

President-elect Obama shouldn’t expect Congress to quickly deliver the second half of the $700 billion financial rescue package.

Senate Majority Leader Harry Reid (D-Nev.) said Tuesday that he does not want the funds released until there’s been a full accounting of how the first $350 billion was spent.

{mosads}The bailout bill approved last year requires a special inspector general to assess this and provide a detailed account of purchases, obligations, expenditures and revenues. The first report is due 60 days after the official’s confirmation, which was on Dec. 9.

Regardless of whether President Bush or President Obama asks for the second $350 billion, he “will have to have that inspector general report,” Reid said.

This underlines Congress’s determination to scrutinize how the money is spent and likely impose more restrictions.

House Financial Services Chairman Barney Frank (D-Mass.) is preparing legislation, and other politicians are frustrated that banks have hoarded capital instead of lending it to business- and homeowners.

The financial sector has long expected additional conditions, and is polishing its lobbying arguments.

Gerry Comizio of Paul Hastings said future recipients could argue that new restrictions have created an unfair playing field, given that banks didn’t face the same restrictions when they took money in the fall.

“Really, the question is what’s fair game in a public policy matter,” he said.

Gardner, of Keefe, Bruyette & Woods, said it’s a great political argument that funds should be used for lending. But implementation might be rough. “You’ve got to be careful you don’t mandate bad loans,” he said.

He told his clients to take the Troubled Asset Relief Program (TARP) money in October because terms would get tougher.

{mospagebreak}Menendez headed to Finance

The new head of the Democratic Senatorial Campaign Committee (DSCC) is expected to be named to the Senate’s most influential panel on economic issues.

Lobbyists expect Sen. Robert Menendez (D-N.J.), who takes over at DSCC from Sen. Charles Schumer (N.Y.), to join Schumer on the Senate Finance Committee. They also expect the panel to add an additional Democrat to reflect the larger majority in the Senate.

{mosads}Eleven Democrats and 10 Republicans served on the panel in the last Senate, but now the ratio could be 12 Democrats to eight Republicans, lobbying sources say. A spokeswoman for the panel did not comment.

Finance has jurisdiction over taxes and trade, and will play a big role in any overhaul of health policy. Serving on the committee could help Menendez raise money from corporations with panel business.

Schumer’s role at the DSCC helped him win the prestigious post, and Sen. John Ensign (R-Nev.), the outgoing National Republican Senatorial Committee chairman, argued that his post meant he deserved the appointment.

Sen. Ken Salazar (D-Colo.) plans to leave the panel and Senate to become secretary of the Department of Interior, while GOP panel members Gordon Smith (Ore.) and John Sununu (N.H.) lost their reelection bids.

Sen. Bill Nelson’s (D-Fla.) name is floating about K Street as a second possible addition to the committee.

{mospagebreak}Weak bench

One reason Rep. Spencer Bachus (R-Ala.) survived as ranking Republican on the House Financial Services Committee may be the GOP’s lack of suitable replacements.

“It’s a weak bench,” one Wall Street analyst said of the panel, which will play a key role in restructuring the financial system and spending what’s left of the $700 billion rescue package for Wall Street. “I think Spencer probably survived because the options weren’t that appealing.”

{mosads}That’s a problem since the panel’s chairman is Frank, widely regarded as one of the brightest members of Congress. Frank is also famous for knowing his way around a quip on the House floor and the Sunday talk shows, and Republicans would like someone who could tangle with him as Republicans try to forge an identity on a bailout they’re leery of, but which was supported by a Republican president.

Silla Brush and Bob Cusack contributed to this article.

On the Economy is a new weekly column tackling the convergence of politics and the economy . Please send tips or comments to iswanson@digital-staging.thehill.com