Stimulus, Deficit and Elections: Obama Has No Clothes
It would be unfair to pounce all over Team Obama this early in their administration. After all, while the Democrats bear a lot of responsibility for the knee-deep toxic mess now covering the floor of the engine room, the bulk of the responsibility has to rest on the shrugging shoulders of Obama’s immediate predecessor and those that came before him.
Early though it may be, however, it’s not too early to come right out and say what needs to be said: when it comes to the steps being taken to address the current crisis, Obama has no clothes.
Both President Obama and Timothy Geithner, the latest recipient of the Goldman Sachs Chair for Managing the Treasury, are on record as saying that the Japanese experiment in quantitative easing didn’t work. They say much the same about FDR’s New Deal. In both instances, they correctly point out that massive doses of government stimulus had no lasting effect.
If the history lesson stopped there, we could all nod our heads in agreement and go about our business.
Alas, the lips of Mssrs. Obama and Geithner keep moving… telling us with great confidence that the reason the fiscal exertions of Japan and FDR failed was only because in each case government didn’t act quickly enough, or with enough monetary vigor.
Having thus explained the shortcomings in prior adventures in stimuli, the administration promises that “this time it will be different” and wholeheartedly commits itself to acting decisively, quickly, and with stunning amounts of cash. By doing so, we are told, they will shock the economy back to life.
But this argument simply doesn’t hold water — there is zero historical precedent for the notion that applying blunt-force government stimulus will somehow mechanically “shock” an economy back into productivity. A couple of bullet points:
- When FDR came into power in 1933, unemployment in the U.S. had reached a high of about 25%. Despite tripling federal spending on the much heralded New Deal, the best unemployment number achieved was 14%, in 1937. By 1939, however, unemployment was back up to 19%. Now, there is some nuance in those numbers, because the calculations include some number of people on the payrolls of the New Deal’s many make-work programs. Yet, given the fact that those make-work jobs would have come to a quick end if the government had stopped its New Deal spending, the poor results of the FDR stimulus hold up.
- In the Japanese crash, the government spent hundreds of billions supporting banks and businesses, buying U.S. Treasuries in an attempt to keep the yen cheap and so their manufacturing sector at work. As the economic morass dragged on, the government cut interest rates to zero, then eventually accelerated spending in a five-year experiment in “quantitative easing,” which involved funding all manner of public works projects and other targeted infusions of government spending into the economy.
Using the equity market as a proxy for the broader economy, the Nikkei fell from around 38,000 at the height of the bubble in the late 1980s, down to around 7,000. During the five-year period of quantitative easing, 2001 to 2006, the Nikkei rebounded by about 100%, moving back to the 14,000 neighborhood. Importantly, however, the minute the Japanese government stopped the spending, the stock market came tumbling back down to around 7,500, near where it hovers today. Note that at no point did it get anywhere near the bubble high of over 38,000.
In sum, the evidence strongly suggests that there is no permanent benefit to be gained from throwing a lot of money at an economy, though there is one clear negative: a steep ratcheting up in government debt. Of course, because the government doesn’t actually make anything, what we’re really talking about is a steep ratcheting up of your debt… and that of your children… and their children.
So, what’s going on? Don’t you think all the Obama’s horses and all the Obama’s men know this?
Maybe they do.
In earlier editions of this missive, I have commented that President Obama may be the best politician in U.S. history. How else to explain how a virtually unknown black man could, in just a few short years, become president. And do so despite a foreign father and two given names eerily reminiscent of two of the most vilified individuals in the current American ethos? Impossible, most would have said, if asked a few years ago. But here he is… undeniable proof of his political skills.
Not to be cynical, but what if, on surveying the landscape, Obama and his inner circle came to the following conclusions about the possible paths they could take in regard to the dismal economy:
Path One: Stand aside and let Mr. Market put on the leather gloves, pick up the truncheon, and get to work pounding the economic dislocations out of the economy. Or…
Path Two: Observe that, during the period of Japan’s quantitative easing, the economy actually did pick up, albeit on a cushion of growing government debt. Using the same approach, one might push the worst of the economic problems past the next presidential election. Given his political skills, that approach syncs up nicely with what is almost certainly Obama’s most pressing personal goal: to avoid at all costs the ignominy of being a one-term president.
Besides, Team Obama could rationalize, even though the quantitative easing will have no lasting effect other than sending government deficits through the roof (a fact that Obama has been very candid about), it will at least buy the new administration some time to come up with another plan that might actually work.
I sincerely believe that just this sort of calculation has been made, and not for practical economic reasons – but almost entirely political ones. Supporting that contention, a large part of the spending in the latest stimulus bill is slated for 2011, the year before the next presidential election is held. Coincidence?
Then there is the $2 billion earmarked for ACORN in that same stimulus bill. While I tend to dismiss the allegations about ACORN’s purported voter fraud as desperate measures on the part of the failing McCain campaign, what we do know about ACORN is that their primary mission is voter registration, and that they are very friendly to President Obama.
It’s all a big win-win… as in “yes we can” win-win the next presidential election.
The way the current mess will actually get cleaned up is through the adoption of measures that support, or at least don’t hinder, entrepreneurs running or starting businesses and expanding into new markets. What we have instead is yet another experiment in more government.
In this matter, at least, Obama has no clothes.
Regards,
David Galland
Managing Editor, The Casey Report
February 23, 2009
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“After all, while the Democrats bear a lot of responsibility for the knee-deep toxic mess now covering the floor of the engine room”
Are you friqqing kidding?????
The Democrats??? How easy and downright cavalier of you to say that.
I mostly enjoy your stories and all…. But this takes the cake…… I’m a blue collar worker… always have been. I have this to say to you guys that play with everyone’s money and hard work…. I’m a former US Combat Veteran, I played by the rules… I supported my family and I made 401k investments like a lot of decent hard working Americans.
But you know what? … I’ve been around to see the complete dismantling of the US Government, the corporate market laws, and the US labor force mostly by the Republican Party. They along with the Corporate lobbyists and people like you have been waging a 50 year all-out “warfare” against the American Working Middle Class first by killing the unions, making stupid unfair trade agreements, closing down factories and shipping jobs overseas, hiring illegal workers, lying about the need of H1B visa workers, always against the minimum wage laws, against safe working conditions that have cost millions of American Workers their very lives if not tragic health conditions, always against decent health care, against social security, Medicare, even against taking care of our wounded military…. Listen you name it and they and people like you are against it.
The only thing you and Corporate America are never against is making a quick easy buck on someone else’s hard work and labor.
Think about it, you guys that run the banks, the stock markets, the Federal Reserve Banking system, the IRS, The entire bought & paid for – US Congress, and greedy CEO’s are nothing more than greedy corporate inside “traitors” that have gone along in betraying the American People and this great nation by destroying the middle class that we “ the “blue collars” help build while you practiced the “Gordon Gekko – “greed is good” grab, smash and run with the money work plan.
Sure it takes capital and risk, and there are many “Venture Capitalist Hero’s” who still has a dream or two to develop and build something wonderful…. But then comes guys like you that have never built nothing, and your only gamble is to seek (sneak) opportunity to turn a quick buck on someone else’s ideas, someone else’s plan, and/or someone’s else’s hard work. And if that doesn’t work, you get the bought & paid for politicians to change the laws to ease your way into someone else’s hard earnings without breaking a sweat.
The reason we are in the “knee deep toxic mess” is due to the greed and “toxic ideas” you guys in the “market” come up with like “mortgage derivatives” “hedge funds” and the like, that are nothing more than schemes and hoodwinks to steal other people’s hard earned money…. Money that is earned by the hour.
Banks make billions per second through fees and hidden charges; mortgage companies make millions per second with up-front down-payments and all the fees and points; corporate CEO’s short stocks, rob and cheat the stock holders… and all you’ve done is overthrown the American Middle Class into despair and helped break the American Engine that made you and your scheming buddies so rich beyond your wildest dreams.
I know I was wiped out by CEO lies and greed @ WorldCom were I worked my heart & soul for over 18 years, and where my entire 401k plan of 18 years was stolen leaving me nothing, groveling for work with no sight in having a decent way to retire.
These “Global Corporations” under the guise of World Trade Agreements have shed the “American Brand” in order to cheat the nation out of paying their fair share of taxes and upkeep of the nation and the people that spawned them. They use the US Military, the US roads, bridges, airports, fire, police, teachers, and all the other infrastructure that supports their product or service, but then pays millions to find the ways and means to deny the taxes needed to support the commonwealth of this glorious nation. They and the US politicians are in Washington not to befit the American cause and way of life, but to ponder and scheme how to get out of paying a fair wage and benefits to which they claim, is all in the name of business.
You greedy thieves and politicians should be ashamed of yourselves, but that won’t happen. Now that you burned up your gravy train, you all scurry like rats and roaches when the light of truth is turned on, only to start pointing fingers at everyone but yourselves.
So Please, for once have enough guts and honesty to lay the blame on your greedy selves… and I dare you to print this in your blog or newsletter.
J.C. San Antonio, TX
Dear J.C. I could not have said it better. Well , I could also add that a stolen election in 2000 shows that none of this was a accident ( http://www.uncountedthemovie.com ) and fear of ATTACK in the HOMELAND gave them full reign to do their deeds of greed! I have had enough of these fact spinners and today I canceled my subscription to CAPITAL & CRISIS.
Dan in New Jersey
David Galland .
You are one big racist. A virtually unknown black man? Would you have said
A virtually unknown white man? No more CAPITAL & CRISIS for me.
George. Not the village idiot
Both political parties bear the responsibility for this mess, which means we the people who elected these morons. We the people as a mob are imoral, gullible and decadent. We are going to get what we have coming. I remember reading that somewhere.
Cheers,
Did you really listen to Team Obama”s explanation of why Japan’s stimulus failed? Japan had a stimulus infrastructure plan, but it was a one legged stool, with too little money, too late. Japan’s government did nothing to force Japanese banks to admit their mistakes in lending, write off losses, fire bank employees and clean up the banks books, so they could be banks lending again (Japan had a problem with, ” don’t lose face” by admitting mistakes).
You didn’t mention Japan’s “Liquidity trap”, where even zero interest rates didn’t help get banks lending again, vs. how Obama’s program is putting about $2 Trillion into the system to boost demand bypassing the banks, with a tax cut to people who need it , and the write off the toxic bad debts so banks can start over again.
Inflationary now?-NO! You didn’t discuss the enormous amount of OPM (Other People’s Money) that was borrowed and then “lost” by these “Masters of the Universe” experts while taking millions in bonuses. Perhaps these financial “experts” should adopt the Japanese tradition of Hari-Kiri for personal failure. These bankers and mortgage outfits lost the savings of others , such as retirement accounts, pension funds, school endowments, etc. Who is going to replace that money and spending power that people with deposits still think is there in those banks and Mutual funds etc. on deposit? If they find out their savings money really is gone, then the REAL panic begins!
. Markets really crashed and credit froze the day after the Lehman Bro Bankruptcy, when there was a run on Money Market Funds, that caused them to stop withdrawals and stop lending markets in short term repos and other loans, due to panic over losses of OPM they had loaned to Lehman Bro. Since that mid-September day, there has been a record contraction of spendable wealth in every country in the world. Letting the Banks and the financial system crash wipes out prudent people’s savings who “think” they have money deposits in these zombie banks. Fortunately they learned quickly about “systemic risk” and have not let a BIG bank fail since. Letting banks fail and with the loss their saver’s borrowed money was part of the death spiral that happened in the 1930s and the downward market spiral lasted from 1929 to 1932 , which didn’t recover until some REAL deficit spending of WW II cured it. This one has the potential to start WW III too. Now that will cost some real money!
Putting money into the financial system does not become inflationary until more people show up to buy with too much money chasing too few goods and services. Right now it is the opposite- there are plenty of goods and services for sale, but not enough customers. Yes, the time hopefully will come when this stimulus works and customers return, and then I hope Congress will have the guts to balance the budget! But right now the economic ship is sinking and Uncle Sam is the only one town with a big enough checkbook to save it. We will have a decade of Depression if the program is too small and too late and a lot of the “the stimulus it too large” crowd seems cheering on the crash of America.
Nobody knows how much water it takes to put out a California brush fire threatening to burn Los Angeles . . Who would limit the fire department’s water supply because it is pushing the water department over budget to supply water to the fire department? I hear some California Republicans complaining about the budget there too.
“You are one big racist. A virtually unknown black man? Would you have said
A virtually unknown white man? No more CAPITAL & CRISIS for me.
George. Not the village idiot.”
Oh please, stop it already! People like you have turned racism into an utterly meaningless charge. Would it make you happy if Mr. Galland said “a virtually unknown man”?
The simple fact is that Mr. Obama was virtually UNKNOWN until 2004. I would say he is still largely unknown because our beloved “unbiased” media made damn sure that anything negative about Mr. Obama was covered up and spun away. I think we’re going to get some very unpleasant surprises as the American people discover what kind of man they elected.