Obama's policies risk another Depression

Scott S. Powell and Ron Laurent

Light at the end of the tunnel or an oncoming train wreck?
In the panic following the insolvency of Fannie Mae, Freddie Mac and Lehman Brothers in September 2008, the American taxpayer was stampeded into bailing out AIG and Wall Street. We were told that $700 billion was needed to establish the Troubled Asset Relief Program (TARP) because the country faced nothing less than a collapse of its financial system.
Inexplicably after Congress passed it -- almost like a bait and switch -- TARP was directed at banks rather than troubled assets. A little more than a year later, TARP Inspector Neil Barofsky reports that AIG's $1.5 trillion in credit fault swaps did not, after all, pose systemic risk. So if we were misled about the TARP bailout, it seems appropriate to question other aspects of government intervention since unemployment, foreclosures and bank failures have risen.

Advertisement

Should we believe Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner that there is daylight at the end of the tunnel or could it be the beam of an oncoming locomotive pulling more economic wreckage?
The Fed is essentially out of bullets with the funds rate at 0 percent. Accommodative monetary policy may be necessary to revive economic activity, but it is neither sufficient nor without risk. Clearly help is needed from effective trade, fiscal and regulatory policy.
Trade policy is the first to consider since the decline in commerce during the Depression was largely due to the Smoot-Hawley Act's increased tariffs. Today, Washington is at odds with free trade, inserting a "Buy American" provision in the stimulus bill and pandering to labor unions.
The Obama administration has overlooked the importance of trade in other ways, such as the failure to get approved free-trade pacts already negotiated with South Korea, Columbia and Panama; new tariffs on Chinese tires and steel products; and letting our competitors race ahead in securing new free trade agreements.
Turning to fiscal policy next, historians recognize that the Hoover administration's sharp tax increases on personal, corporate, inheritance, gift and excise taxes -- all passed on and added to by Franklin Roosevelt -- were a defining feature of the Depression years. In this regard, the Obama presidency will be the first administration since Eisenhower to raise taxes during a recession.
In fact, campaign promises notwithstanding, Obama has one of the most ambitious tax increase agendas of any President. He proposes new taxes on health plans, surcharges on the wealthy, drug companies and device-makers, foreign-source earnings, capital gains, personal income, estate, financial transaction, carried-interest and energy -- through a cap-and-trade regime.
In addition, Roosevelt created an alphabet soup of new regulatory bodies and unprecedented regulations to redress business and investment excesses following the stock market crash of 1929. In a new script of the old play, Washington is now similarly intent on massive enlargement of government bureaucracies, expansion of labor unions and regulation of the health care, banking and finance as well as the utility and energy sectors.
If the missteps in trade, tax and regulatory policies were not enough, the killer bullet to the U.S. economy could be the shrinking of available credit to private business, which is the mother's milk of recovery.
In the last year, the federal budget deficit soared 207 percent to $1.42 trillion, all of which is financed with increased U.S. Treasury debt. Successive years of additional red ink will likewise require issuing more government debt at a time when our largest creditors, notably China and the OPEC countries, have signaled reluctance to increase their exposure. The most likely investors to pick up the slack in buying this debt will be domestic banks, which will crowd out lending to businesses that need capital for expansion and job creation.
If tempting fate with a second Depression is too abstract, what may prove to be the turning point on both sides of the political aisle is the harsh reality of hitting the federal government's $12.1 trillion debt ceiling by year end. A fitting New Year's resolution would then be to vote against anyone who favors continuing down failed paths and cannot commit to debt reduction.
Scott S. Powell is managing director of AlphaQuest LLC and a visiting fellow at the Hoover Institution. Ron Laurent is the managing partner and chief investment strategist of Veritas Partners LLC.