The end of conservative cronyism

By Bill Fleckenstein

Obviously, the most important news last week was the Democrats' sweep across the country. However, it's difficult to talk politics without letting one's own biases filter into the equation. So, in order to make it easier for folks to parse what I say about the ramifications of the elections, let me just state my biases up front.

Seeing the forest, trees and Bushes

I am neither Democrat nor Republican. Rather, I'm a libertarian. What I believe in is less government, not more. My "platform" is three-sided: institute term limits, a flat tax and tort reform. Having said that, it probably won't come as a shock to folks to learn that I have voted Republican the overwhelming majority of time (though I voted for neither Bush, father nor son, the second time around.)

As to the impact of the Democratic rout (which the Republicans brought on themselves), I believe that in the very short run, it probably means not very much because Bush will have veto power over most anything the Republicans dislike. Those who say we will have gridlock are correct. And, at the margin, gridlock is good -- if you believe, as I do, that the government generally makes matters worse.

However, that is where the good news stops. I anticipate a plethora of investigations about all things Republican, resulting in a mountain of accusations, recriminations and hostilities in the new Congress. Which, if the economic news is poor, will only tend to amplify negative stock-market psychology.

Compassionate cronyism

More importantly, I think that if one takes a step back, one would see that ever since the Republicans took control of Congress in 1994, government has been more pro-business than has been the case for many decades. And, interestingly, if one looks at a long-term stock chart, as I've noted many times, there's a hockey stick, or steep upward climb, that starts in 1995.

One of the first pieces of legislation passed by the Republicans in 1995 was the Private Securities Litigation Reform Act (PSLRA). What the law did, in effect, was to provide corporate America with a safe harbor, whereby their press releases could say: We may be lying to you, but since we're telling you we may be lying to you, you can't sue us.

When that legislation was passed (over Bill Clinton's veto), I was concerned that it might lead to corrupt behavior, because corporate America would believe that it was basically bulletproof. I believe that my fears came to pass, but obviously, that legislation wasn't the sole cause. The unchecked mania of the late 1990s facilitated greed and corruption. And, as folks know, I blame most of the wild, irresponsible behavior regarding the stock market -- and later, the housing market -- on the Federal Reserve Board.

But I think that the mood has been aided and abetted by a pro-business Congress. I believe that over the past 12 years, we've come to a place where Congress and big business are as greedy and corrupt as any time they've been in the past 50 years. (And people who know history better than I do might make that case for a longer time frame.)

Big 'patriots' paying small taxes

The last nugget handed out by Congress was the Repatriation Act (which bookends the PSLRA), whereby last year corporations were able to bring back foreign profits at the stunningly low tax rate of 5.25%. Of course, there was plenty of (pork-laden) legislation in between. Ditto tax cuts, which I generally favor, because anything that takes money away from the government is a good thing.

That has all ended. And while the new Democratic Congress may not be in a position to do any damage to the economy or to business, it's certainly not in a position to ride to the rescue if we experience any sorts of problems.

Long-term Sturm und Drang

On the other hand, there will be endless chatter from the Democrats in Congress that is anti big business (and probably more protectionist) and pro tax increases. Expect to see plenty of discussion regarding the massive imbalance between what corporate executives and the average worker walk home with. Those issues may have a large impact on what happens in the 2008 elections.

In sum, I think that while the election results are not necessarily a huge issue in the short run, over time they will be seen as decidedly unfriendly to business and the stock market.