Fearing recession, Wall Street eyes election warily

By Joanne Morrison - Analysis

NEW YORK (Reuters) - As Americans begin the process of choosing their next president, some Wall Street analysts worry that the election results could pave the way for higher taxes that would hurt a U.S. economy already in a slowdown.

Voters in Iowa began the process on Thursday of winnowing the Republican and Democratic presidential fields. The two party nominees will contest the presidential election in November and the winner will take office in January 2009.

While Wall Street investment banks and securities firms, which manage trillions of dollars and sway markets across the globe, cannot predict the winner, they are already factoring in the possibility of tax hikes under a new administration and Congress.

"I think there are lots of political risks out there," said Morgan Stanley chief economist Richard Berner, whose bank last month reported its first quarterly loss in its 74-year history after making bad bets on risky mortgages.

Wall Street, which tends to favor Republicans, fears that plans offered by Democratic candidate to reverse tax cuts put in place during President George W. Bush's tenure would hurt an economy already under pressure from a prolonged housing slump and spreading credit shortage.

Wall Street economists believe those tax cuts helped the economy recover quickly from the recession that followed the September 11, 2001 attacks and weather the subsequent shock of caused by Hurricane Katrina in 2005.

"Letting any of the tax cuts lapse and going back to prior tax rates would be essentially a tax increase and that would be damaging," said Alan Sinai at Decision Economics in Boston.

Several Democrats have proposed rolling back the tax cuts, which they argue overwhelmingly benefited big corporations and the richest Americans, including many on Wall Street.