No matter what deal is finally agreed to by the politicians in Washington it will act as a brake on the economy. Reduced Government spending and higher tax rates for the wealthy will lower the national growth rate. This is not complicated, it is simple economics. One would hope the negotiators would be sensible enough to pick a target growth rate and try to craft an agreement that will start to solve some of our long term issues without suppressing the economy too much. The effects of misplaced aggressive austerity measures can be seen in Europe where there is bubbling civil unrest because the economies are contracting. The contracting economy decreases the opportunities for the unemployed and the young people entering the work force while reducing government tax revenues. The solution to massive budget deficits and runaway government spending will take a long time, it cannot be corrected in a year.

For all you fans of financial scams, next year should be a banner year. Pay particular attention to "crowd funding" and "non-publicly traded REITs". I believe both of these are "unborn sorrows ripe in fortune's womb" to quote the Bard. When these scams finally land we should think about going after regulators who should be on the case but once again are MIA. One of the regulatory bright spots in 2012 is the retirement of Mary Shapiro. Mary, who held significant positions at FINRA before moving to the SEC, proved just as ineffective at both agencies. I can't think of any financial scandal that occurred during her tenures that she had any clue was coming. If any reader knows of any, please let me know.

As the year draws to a close I have some random thoughts about the economy;

I believe we are going to go off the "fiscal cliff". This is a bet on the inability of Congress to agree on what day of the week it is rather than any analysis of our economic situation.

I think it is time for the leadership of the House of Representatives to lay out their fiscal plan in mind numbing detail. This would start a much needed debate about the direction of the country.

I think the economy is doing better and the real estate market is showing signs of life. The American voter will always vote the economy so the takeaway from the election is that most people think the economy is doing well and are optimistic about the future.

I don't think going off the "fiscal cliff" will be that devastating. It will certainly be deflationary and push the economy towards a recession but since I believe the economy is stronger that the talking heads on TV are saying I think the country will skirt a recession and stay in positive territory. It will be close.

I think that nothing has been done about the Greek crisis other than that some near term liquidity has been provided. Two years ago I was quoting a senior government trader as saying it is a "liquidity solution to a solvency problem" and that is still the case.

I believe next year will see Italy join the ranks of bailed out Euro members.

I think 2013 will be a pivotal year for the municipal bond market as financial stress on cities, states and local entities will change the way the market looks at credit quality. I expect more Chapter 9 filings, more privatization and more conflict with public employee unions. How it shakes out is anyone's guess, stayed tuned.

The presidential election is over. One of the interesting outcomes of the contest is the use of the Super PAC money and corporate donations set in motion by the Supreme Court's ruling in the Citizen's United case. Donors like Sheldon Adelson spent over 50 million dollars in support of a candidate who lost. This is a tremendous redistribution of wealth. Mr. Adelson has recycled a significant amount of money to media outlets, copy writers, admen and political consultants. This amounts to a private economic stimulus program. I assume the wealthy donors are concerned with tax policy and part of their contribution was to ensue US tax policy would remain friendly. Just how much extra tax will Mr. Adelson have to pay on an annual basis that would justify a 50+ million effort?

After every election half the country is disappointed, I understand that because I have only voted for the winner 4 times out of 11 presidential elections. We owe the winner, who represents the majority of the country some leeway to implement their campaign promises. The American people generally vote the economy, if the incumbent is reelected the people are saying the economy is OK, if the economy is not OK we elect the challenger. Whoever loses needs to accept the result and go gracefully into the good night. Mr. Romney does not need to vilify the electorate by impugning their motives. We are not all on the dole, most people want to work and create a good life for their family so we need to stop the talk about how half the country are moochers and somehow the Administration ladled benefits on part of the population for their votes. Mr. Romney did not convince enough voters that he was a better alternative to Mr. Obama, period.

Speaking of going gently into the good night Alan Greenspan who as chairman of the Federal Reserve could not have been more wrong or have chosen a worse policy for the US needs to disappear from the airwaves. We should have some minimum standard for past performance before we allow a person to air their opinions in public again. Whatever standard we decide is right Mr.Greenspan will certainly fall short.

Hurricane Sandy has landed in New York and New Jersey. Amid the destruction some very positive things have emerged. Andrew Cuomo, Michael Bloomberg, Chris Christie and Barack Obama once more showed us that public servants work for the public. The governors and the mayor marshaled the forces at their disposal and got out in front of the storm with warnings and evacuations. They are working tirelessly to help their citizens come back from the devastation which will take a long time. The President has visited the area and is bringing the full resources of his office to provide what the states need. It is nice to see politicians of different parties forget the rancorous verbal jousting and concentrate on getting something done for the public. The national debate has been hijacked by blithering idiots like Grover Norquist, Glenn Beck and the like who would have you believe the secret to happiness is carrying a gun and shutting down the Federal Government.  For the love of God just shut up!

Better people are better. That silly little expression is what we tell ourselves when we look to hire a new employee. If you appoint an incompetent like Michael Brown to head FEMA you will be unable to get a 12 oz bottle of water delivered to a major American city short of 4 days. Likewise if you appoint a failed congressman like Christopher Cox to head the SEC Wall Street will drive the banking system off a cliff  fueled by greed. Pop quiz: Who is currently head of FEMA? Answer: nobody knows and that is how it should be, because when it works correctly we do not need to know.

The impact of the storm is enormous in the tri-state area. One of the great things about people is their willingness to help their neighbors. They just show up with a broom or chain saw and with a brief nod pitch right in. I believe this is true in all disasters in the country regardless of the region and it doesn't matter what your religion or politics are, it is just people helping people. We need leaders who will focus on this aspect of our national character and not seek to exploit petty differences.

In January of this year I predicted that Barack Obama would be reelected in a close race with Mitt Romney based on the fact that the US economy would be in some form of OK. I still believe that and we will find out in two weeks. Most people I know have already decided who they will vote for and cannot wait for the election to be over so we can get on with our lives. I have said before that who ever wins will be facing difficult choices and the decisions made will have significant impact on the economy in the next few years.

One of the markets I follow closely is the municipal bond market. There have been a number of municipalities that have filed for Chapter 9 bankruptcy protection in the last year and the resolution of these filings will have a huge impact on municipal finance. So far there has not been a clear pattern emerge concerning the discharge of debt, union contracts, employee benefits and a host of other issues. Once these issues start to be decided, municipal bond holders will be forced to reevaluate their holdings and look more closely at their standing in the court process. There are important differences between Chapter 9 and commercial bankruptcies (Chapter 11 etc.). This link outlines some of the considerations and criteria necessary for a filing for Chapter 9 protection. http://rseelaus.com/municreditwatch.shtml

Since the 1970's the use of the bankruptcy code by US businesses has been on the rise. If you are a bondholder in a bankruptcy you have seen your investment wiped out with the stroke of a pen. Sometimes in a large bankruptcy like GM 35 billion in debt is replaced with a very small amount of stock in the new company. Jack got a better deal than that for his cow when he swapped it for magic beans. If municipalities can successfully void interest and principal payment the politicians will drive a truck through that loophole rather than correct the long term problems of employee benefits and wasteful spending. Stay tuned.

In today's economy we have to take our victories in small doses. Last Friday the unemployment number was down as a result of more people working. The hook in the number was that many of the people had to take part time jobs. This is how the system works, first you look for a comparable job to the one you lost but eventually you must face reality and start to rebuild your career somewhere even if it is part time, seasonal or temporary. I believe most people like to work and feel productive and they would rather be doing something than sitting idle. It never made any sense to me when politicians talk about how people are living this wonderful life on food stamps and unemployment checks.

The housing market is showing signs of not being completely dormant. The foreclosure rate is dropping. Again a small victory. The Federal Reserve has been throwing low interest rates at the real estate market for four years now and if we didn't see some signs of life by now there would be no hope for the economy.

In 2009 I said that if you believe the current slump should be dated from 2007 we as a country would be fortunate to emerge from it in 10 years. I still believe that to be true. We have made some progress, the fact that we opted for stimulus initially gives us a better chance than Europe to correct our macro imbalances in the future, but I think we still have a ways to go. The next administration will be faced with a difficult set of choices comparable to the ones the current administration faced their first day in office. I hope that whoever is elected decides to play in the real world and not some gated community of economy fantasy that seems to be a large part of campaign rhetoric.

The last thing a business man wants to do is create a job. For the past twenty years the direction of business is to run a bigger entity with fewer employees. This is the tech revolution. This process is the cruel calculus of capitalism. If you don't keep up, you will be left behind. The private sector is doing what it always does in terms of reinventing itself to stay relevant and in business.

The public sector is a different story. The first thing a politician wants to do is create a job. The politician's own job depends on it. The current  recession has slowed this process as states and cities face the fact that they cannot afford to keep paying the salaries and benefits promised to the public workers. One would hope that during our national campaigns there would emerge a meaningful debate about what we, as a society want from our government. The present cost of government is not sustainable yet everyone wants services to remain the same. It doesn't work like that, there has to be a trade-off between costs and services and we need to prioritize. We cannot have it all.

Random thoughts at the end of the third quarter 2012

We have absolutely no idea what is going on in China and how their economy is really doing (not well I think).

Nothing has been settled or changed or solved in re Greece, Spain, etc.

The social unrest in Europe augers for a difficult year ahead for policy makers world wide

Based on the recent European elections it seems that the wealthy euro countries are still committed to working the situation out.

Whatever tenuous grasp Moody's Investor Service had on reality was severed last week with it's announcement about the rating of US Bank corp. Moody'd said it is worried not about US Bank but that the other banks in the area are recovering and they might present more competition. Moody's is apparently worried about  " U.S. Bancorp's long-term ability to sustain its consistent, superior performance in light of increasing competition" to use Moody's own words. If only Moody's had conducted it's business as well as US Bank we might have avoided the financial meltdown of 2008.