The Politics of Stimulus Spending and Bank Bailouts
Investors, economists and ordinary citizens recently occupied a front seat at President Obama's unveiling of his financial and economic resuscitation initiatives. What we got was politics as usual. Congressional leaders - those with the most seniority in the governing party and who control the legislative agenda - were let loose to do what is normal for them.
Politics as Usual
Nancy Pelosi and Barney Frank led the charge in the House constructing President Obama's signature legislation on spending, the "Recovery and Reinvestment Act." What did they do? The predictable. They assembled all their unfunded wish lists created over time through their association with the myriad of special interest groups and the folks back home in their constituencies. This, we were told was to be the stimulus that would get the economy moving again.
To be effective, stimuli must be timely, temporary, and targeted according to Lawrence Summers, the President's chief economic advisor. The President and Congressional leaders ignored him. The Wall Street Journal suggests that less than ten percent of the $800 Billion will be cash flowed in the short term. What is worse, most of the funding recipients are not temporary projects, rather they are ongoing programs with no end in sight. In other words, when these expenditures finally do get started, it will be almost impossible to turn the funding faucets off in future fiscal years. Welcome to $1.5 to $2 Trillion annual budget deficits for as long as the eye can see.
Now we turn to what was supposed to be the second blockbuster of early February. "Targeted Asset Relief Program" (TARP 2.0) is the legislative vehicle which is designed to finally unclog the credit and lending pipeline run by the banks.
Back in November Henry Paulson, then Secretary of the Treasury and former CEO of investment bank Goldman Sachs, along with the active assistance of Tim Geithner, who at that time was the President of the New York Federal Reserve Board and Ben Bernanke's designated hitter, stampeded Congress into giving them over $700 Billion in emergency funding to avoid what they called a freezing of the global financial markets. Fear of a global financial meltdown was employed to great effect to round up a majority of Congressmen of all persuasions to obtain their immediate assent.
Paulson and Ben Bernanke, Chairman of the Federal Reserve Board, claimed that unless this was done immediately global financial markets would capsize and the world's economies would sink. Apparently no facts of consequence accompanied this most unusual demand for immediate funding nor did the legislation authorizing it require Mr. Paulson to explain the criteria for disbursing the money or which financial institutions were eligible, which were not and why? This legislative coup is now referred to as the TARP 1.0 bank bailout funding initiated by President Bush. Incidentally, it is now universally agreed that TARP 1.0 failed in achieving its objectives, whatever they were.
Lack of Fundamental Change
An important question arises given the continuity of several key financial operatives working both in the Bush and Obama administrations. Is it possible for the voting public to expect fundamental change of the kind President Obama seemed to promise throughout the primaries and election campaigns?
The President has made several recent speeches citing alarm over the growing economic storm clouds by noting how crucial it is to make quick decisions to get the bailout and spending money working. It seems to some observers that the urgency was more intended to avoid serious scrutiny of the spending proposals than a fear over the gathering financial and economic storms. Why the skepticism? Larry Summer's advice stressing timely, targeted and temporary stimulus and bailouts seems to have been ignored in large part. Also, we all should be critical given the ruse used to get the first TARP approval by Messrs. Bush, Paulson, Bernanke and Geithner.
Public Being Misled
In fact we all now should be most concerned that the public is being hoodwinked yet again given current White House Chief of Staff Rahm Emanuel's recent candid offhand comment that one should never let a good crisis go to waste. Given Mr. Emanuel's graduate training in advanced political machinations in the Clinton White House and his clear success in navigating the polluted waters of Chicago's Cook County Democrat party politics, he has become a master operator in obtaining a desired political outcome. It isn't difficult to see his less than invisible hand strategizing the President's actions in these issues.
Lack of Bi-Partisan Support
Given Emanuels's proven political skills, one can not help but wonder why such an accomplished strategist would use old Democrat warhorses in Congress, such as Chris Dodd, Nancy Pelosi and Barney Frank, to draft the spending measures? This quandary is especially puzzling since the President seems to have placed so much importance in obtaining bipartisan/Republican support? The prominent role played by the old guard of Democratic Party legislators was nothing more than a red flag to so many equally partisan Republicans. In the end, President Obama got his tainted legislation with only token help from across the partisan aisle.
Lack of Leadership
The President could have used the stimulus spending legislation at the beginning of his mandate to demonstrate to everyone that he personally was clearly in charge. He could have demonstrated a clear break from the old style politics and politicians of Congress who are so indebted to lobbyists, special interests and to the delivery of pork to their respective constituencies. In other words, Mr. Obama could have used this golden opportunity to showcase his leadership skills, his authority and his commitment to specific and real change. His campaign rhetoric concerning "change" would have been made real. He would have made substantive progress in demonstrating that he was a genuine post partisan President in a time of national crisis.
Unfortunately the new President did not exploit this almost perfect opportunity. The nation is worse off because he frittered away what had to be his moment to demonstrate a genuinely new approach to the old and discredited political games for which almost everyone, other than hard core partisans, have come to shun in shame.
The President did not use the overflowing reservoir of public goodwill following his recent inauguration. His approval ratings were at that stage unprecedented. Almost all persons, regardless of political stripe, were hoping he could do what was necessary to deflect and avoid the worst of the current and impending economic doom. The President has now demonstrated he has feet of clay.
Where to now? More politics as usual. Rather than containing the almost $11 Trillion in official accumulated debt, in this and future years the US will add to it at a rate of $1.5 to $2 Trillion annually. For purposes of context, debt stood at $5 Trillion as recently as the year 2000 when President Bush took office.
But the genuinely scary reality is that debt now stands somewhere between $60 and $99 Trillion if one factors in the unfunded liabilities for future obligations such as Medicare and Social Security. Indeed, if the federal government adhered to accounting principles which government regulation demands of the private sector, these overwhelmingly large numbers would be the official debt figures. These numbers are factual, not a figment of the author's fertile imagination.
David Walker, former Comptroller General of the United States and Richard W. Fisher, President and CEO of the Dallas Federal Reserve Board, certainly do. They are the authorities who authored these scary numbers.
They, among many other concerned persons in the know, leave strong hints that these debts are too large to pay off. Doubling tax rates can not come close to doing the job nor would voters allow politicians to impose them, even if politicians had the courage.
Expecting the economy to grow at double digit rates is certainly not possible now or during the indefinite future. Nor is it remotely possible when or if conditions "return to normal" when the best we can hope for is annual growth in Gross Domestic Product at the rate of two or three percent.
Of course the federal government could refuse to pay its debt to its increasingly foreign creditors such as China, Japan and oil state Sovereign Wealth Funds. But somehow the American Way doesn't permit such dead beat defaults normally associated with Banana Republics. However, the world's wealthiest and most powerful nation will soon be seen in such lowly company if it does not take this issue seriously, starting now.
Incidentally, the American dollar is the world's reserve currency which most nations use to price and settle their trade accounts. Therefore an outright default will not be seriously considered. The one alternative which, by the process of elimination, will invariably be accepted is a devalued dollar resulting from currency inflation. More on this subject at another time.
More Spending (Debt) Seen as Solution
So what should we expect ahead following the new Stimulus Spending Act and pending TARP 2 corporate welfare designed for financial institutions? Not much. Because of the massive mess throughout the global financial sector and the economies of most other nations, most palliative intrusions will likely have the same effect as one would get by pushing a rope up a hill. In other words, no real effect, much frustration and real agony among many.
Respected economist Dr. Marc Faber makes this case much more definitively when he states that Bernanke, Geithner and other Fed officials "were among the chief architects of easy money and are therefore largely responsible for the credit bubble that got us here. Worse, their commitment to meddling in the markets has only intensified with the adoption of near zero interest rates and massive bank bailouts."
So why is so much noise being made about what is being proposed or implemented? Simple. The public is living in fear...their jobs are tenuous, their mortgages represent more than the declining value of their homes, and precipitous financial market declines have thrown pension plans and retirement savings into disarray. All this came so suddenly after an extended period of apparent and self indulgent prosperity based on excessively low interest rates, overspending and easy credit. Life was good and it seemed so normal.
When the financial crisis suddenly emerged six weeks before the November 4th elections, politicians went to work doing what they do best. What is that? A cacophony of talk designed to convey to the voter that they empathized, that they felt the fear, that they would do what it takes to "fix the problem." How does the politician do that?
Talk and talk some more and spend and spend more and even more. But where does the money come from? Easy. Borrow it. If that doesn't work, the Federal Reserve Board under Ben Bernanke will create it. He is an expert economist of the Great Depression and has written and said on numerous occasions that the Great Depression would never have had to happen had the government inflated the currency and allowed unlimited credit.
So today we have a FED which is committed to creating as many digital dollars as is necessary. In other words, if politicians won't tax, and lenders won't lend, and if the economy can not be grown out of its declining morass, unlimited amounts of new dollars will do the trick. Prosperity will somehow magically return. After all, recent Fed Chairmen have earned their political stripes by proving that they are most adept at synchronizing their actions with the political needs of those occupying the White House and Congress.
A look over the political landscape reveals that almost all participants are reading from this same spending, borrowing and money printing playbook. Virtually all politicians, most mainstream media opinion leaders, Wall Street and Main Street business leaders, labor unions and the public apparently do. Given this kind of consensus, is it any wonder that such wanton and useless spending is underway? Where is the opposition? When one periodically hears its plaintive bleats, they are generally booed off the stage. They are unpatriotic. Indeed, they are thought to be sadistic in seeming to desire that people lose their jobs and houses.
Can stimuli and bailouts of banks work? Of course not. With US housing having lost $7 Trillion in value to date, equities and other investments having lost an equal or greater amount, and financial institutions having lost virtually all of their assets, a mere few Trillion dollars of make believe money thrown to some insiders and those with the loudest pleas simply can not make more than a minor impact.
Politics dictates that politicians and those in charge try to make a difference. It is important that they be seen to be doing something ...whether it works or not. Otherwise they be deemed not to be doing their jobs. If the politician is of the elected version, regardless of the partisan brand, s/he has no choice but to talk confidently and with authority advocating spending programs. Of course they have no idea whether the borrowed money will achieve any discernable result, but at least they are demonstrating their version of political leadership.
The unelected bureaucrats, such as the Treasury Secretary and Federal Reserve Chairman along with their armies of economic, policy and administrative technocrats, see crises such as these as career possibilities and opportunities to exercise the leavers of power. It is an exhilarating experience given that most of their respective professional lives are spent in anonymity toiling away on mainly mundane issues of little consequence.
The entire process is essentially political in nature. In large measure it is a public relations exercise designed to make the public feel good that their leaders are on call "fixing the problem." All the while insiders will use their connections to get their jar of the m/honey flowing from the federal treasury pipeline.