http://acuf.org/issues/issue140/090927news.aspPhony Economic Recovery
by Donald Devine
Issue 140 - September 30, 2009
“We're on the road to recovery,” President Barack Obama told a sympathetic union audience following last month’s government report on jobs: “Don't let anybody tell you otherwise." A few days later Fed Chairman Ben Bernanke went further, insisting the recession was “technically” over. Unfortunately, the facts in that same report prove otherwise.
One knows he is in trouble when his own study shows the country lost an additional 216,000 jobs and the president can only reply that “for the second straight month, we lost fewer jobs than the month before ” and that the “trajectory is in the right direction.” He neglected to note its 9.7 percent unemployment rate was the highest in 26 years. Over 7.4 million Americans had lost their jobs since the 2007 recession began. Even Bernanke conceded employment will not recover soon. Actually, it is worse than that. The average employee now works and gets paid for only 33 hours per week and the unemployment rate including those who have been discouraged from even looking for work is an incredible 16.8 percent, doubling the unemployment level the stimulus was supposed to avoid in the first place and approaching Great Depression era levels of 25 percent.
What is the president thinking about? Why, all of the jobs he created with the massive $780 billion Treasury stimulus bill. The White House claims one million jobs were “created or saved” so far. Are they not already included in the statistics? Well, only $300 billion has been spent. To the president, that proves when the bureaucrats get around to spending the additional $480 billion that will produce recovery. In total, the president promised 3 million new or “saved” jobs. But even if all of the jobs promised from the stimulus were new, that would still mean less than half of the seven million who lost jobs would be back at work. More important, these are temporary, government jobs. What happens when the funds run out? President Obama responds that he will create new jobs, green jobs, using his czars to develop them, as with his announcement at the union rally he was upgrading his auto czar to manufacturing czar (filling it with a former union consultant) with a mandate to “craft the policies that will create the next generation of great manufacturing jobs.”
It is heartwarming that someone still has faith in government expertise to create jobs and indeed to solve all problems. Not many people do. A very recent Gallop/USA Today poll found “ 57% of adults say the stimulus package is having no impact on the economy or making it worse. Even more —60% — doubt that the stimulus plan will help the economy in the years ahead, and only 18% say it has done anything to help improve their personal situation.” A study [available here] of the economic data by John Cogan, John Taylor and Volker Wieland demonstrates the people are correct. Neither the Bush 2008 nor the Obama 2009 stimulus increased personal consumption or growth.
Everyone agrees it was bad loans, principally from semi-public Fannie Mae and Freddie Mac that caused the economic mess in the first place. So Congress responded by shifting mortgages to the Federal Housing Administration, to manage them better solely under government supervision. So, FHA’s share of mortgages increased from 2.7 percent in 2006 to 22 percent this year. What is the result of more government “crafting?” FHA has just informed Congress it will not be able to meet its required reserves and may need a bailout, in addition to perhaps $1.5 trillion bad mortgage debt still at Fannie and Freddie. No one knows how much more bad mortgage debt hides in private hands.
Well, at least the Securities and Exchange Commission was keeping the private sector honest? Well, the largest fraud of all time involved a Bernard Madoff, who federal officials estimate stole $65 billion from clients by running a straightforward Ponzi fraud that simply deposited funds in an account and then paid enough out of it to keep the “investors” quiet. It was not rocket science and it took place right before the SECs eyes. Madoff himself told the inspector general who reviewed the matter afterwards he was “astounded” the government regulators could not discover he was not even making trades but was hoarding the funds. Did he just slip by? No, the SEC opened five inquiries over the past 16 years into his account, missing this uncomplicated fact in each. Alerted by a prominent investor in 2003, the SEC even opened two probes, in Washington and in New York, and both ended with no action. As the IG noted, a simple phone call to Madoff’s depository would have shown he was not even trading. The SEC learned of Madoff’s fraud only after he confessed.
The SEC excuse, reported in the Washington Post, was that its agency “doesn’t have the resources necessary to oversee the exploding number of financial firms.” It is the classic government defense. We failed, so give us more money. But the bureaucrats were informed at least six times by credible sources that Madoff was involved in criminal activity, including one that specifically said it probably was a Ponzi scheme. The SEC had five different bites at the apple by a half dozen different investigative teams to get him and they all failed miserably. Congress is considering giving SEC more power and resources. But it was not a matter of resources. The SEC had the authority and the people but its bureaucrats would not even make a phone call.
Bernanke’s Federal Reserve is no more efficient than the Treasury, SEC or FHA. Re-appointing Bernanke made him the president’s man. How has he done? After interviewing many economists, The Wall Street Journal’s David Wessel concluded the experts believe Bernanke’s actions did help avert a worse crisis. But they differed greatly on which of his actions did so. In other words, they did not have a clue. Even conceding some improvement in the economy – although even the White House report admitted it is very limited - why did the recovery start in France and Germany? Both nations actually ignored Federal Reserve pressure to use massive bailouts and liquidity to stimulate their economies and they led the way. It was a mere 0.3 percent gain but unlike the U.S., which threw trillions of dollars at the problem, the results were actually positive. Whether it lasts is another matter.
The real problem, as even Bernanke acknowledged in another statement, is drawing down the enormous liquidity created and supported by Treasury bonds. While exuding confidence that the Fed can drain the inflationary swamp, few even of the most optimistic are assured since the Fed keeps sending signals that it will not increase interest rates. Any attempt to restrain credit will endanger the fragile recovery so the political pressure not to do is enormous. Rather than restraining spending to ease the pressure, President Obama has plans for health, energy and education that will vastly expand it. The Fed can handle private central bank functions but the economic planning dreams of the central bankers are just that, dreams. No one knows how to do this and even if they did, making unpopular but necessary decisions in a democratic government would frustrate them.
What would a free marketer do? The problem is that government has become so involved in the economy today it is almost impossible to separate it from the free institutions of society. Even a private central bank (i.e. a dominant player but without monopoly support from the government) could properly ease or tighten credit, even theoretically up to what the Fed actually did. The Bank of England was once basically of this nature. Yet, a private bank would almost certainly have not gone near as far as the Fed since it would have been extremely risky. Even the Fed sought the security of backing from government bonds. The almost trillion dollar “stimulus,” the later bailouts, coercing the banks that did not want to participate and the explicit guarantee of “too big to fail” were clearly not private functions, however, and there is no evidence these helped at all, especially for the long term. The public certainly does not think so.
All this, of course, is purely theoretical since the Fed does exist with a government monopoly and backing. Given today’s mess someone must act as a private central bank would in a crisis and the Fed is the only alternative. Some credit intervention can be justified but the fact the Fed has a monopoly and unhindered access to the Treasury forces reckless expansion of credit topped by extraordinary spending that significantly inhibits growth as Europe and Japan have learned, or leads to massive inflation, or to both, i.e. stagflation, as the U.S. demonstrated under Jimmy Carter. Rep. Ron Paul is on the right track here, remove the Fed monopoly, cut liquidity and spending, and slowly separate the bank from the government functions.
Unfortunately, there are consequences for improvident actions and the U.S. will pay one way or another. Everything President Obama has proposed would only make things worse. At 21 months duration, his recession is already the longest since World War II. It will be extremely difficult to escape unharmed as even Bernanke conceded. But it goes deeper. As lawyer Harvey Silverglate argues in Three Felonies a Day, existing regulations are so numerous, obscure and conflicting, it is impossible for a businessman to act without violating a law or regulatory dictate. With everyone afraid to act, the economy has become chaos.
Almost no one has noted that the “ownership society” once so giddily proclaimed as the future guarantee of majority support for capitalism is gone. The Investment Company Institute has announced that its latest survey finds that the share of U.S. households that own stocks has fallen from 53 percent in 2000 to 45 percent in 2008. Although the public remains skeptical, if Mr. Obama continues along his present course, his fettering of the market may become so excessive people may in fact turn to socialism as the only remaining choice. Or perhaps they will wake up before it is too late.
Topic: Phony Economic Recovery: Why it won't last. by Donald Devine (Read 1046 times)