Obama and Bernanke-- U.S. Economy’s Yin and Yang

There is a tug of war of negative (yin) and positive (yang) energy in our economy evidenced by a stock market that cannot seem to break free from a very tight trading range. Over the past year the Federal Reserve, led by Ben Bernanke, pumped an unprecedented amount of capital into our economy to keep a fragile financial system from falling apart. At the risk of completely trashing the dollar and potentially igniting a high (even hyper) inflation rarely witnessed in the northern hemisphere, the Fed lowered and has kept interest rates near zero since late last year. It also exploded its balance sheet by trillions of dollars by buying a variety of government and mortgage-related bonds. The Fed's plan was to reinforce the financial system by flooding the market with liquidity in the hope that all that cash would encourage banks to lend and individuals and businesses to spend, invest and ultimately spur economic recovery.

Despite all that capital and the bailout of our financial system by TARP, bank lending has continued to languish. Banks have cited poor borrower demand as the cause, but the fact is that banks are terrified to lend. They have been to the brink of extinction and have been forced to submit to government control in order to avail themselves of the capital needed to survive. They fear that even the strictest of lending criteria may not keep them from falling further into the financial abyss as asset values (loan collateral) continue to fall; they also dread the prospect of ever having to seek additional capital from the government. In addition, the Obama administration’s willingness to change the rules of the game and to abrogate the rule of law in order to further its political agenda has compounded those fears and has contributed to an environment too uncertain and risky to justify new investments.

As experts extend their expected time frames for economic recovery, the banks know that conditions are unlikely to improve in the short-to-medium term, and could indeed be exacerbated by the president’s continued priority to implement the most liberal agenda in our nation's history. The stimulus plan executed last February has thus far proved to be a bust and a growing consensus believes his current “cap and trade” and “healthcare reform” initiatives could have catastrophic effects on the economy and our exploding government deficit. Furthermore, the president’s stated intention to raise taxes on investment capital and small businesses is providing a backdrop of negative energy that could hold both the economy and the stock market hostage for many years to come.

Aggravating an already bad situation is the possibility of replacing Mr. Bernanke when his term expires early next year. The real concern would be if the president replaces him with an individual more sympathetic to his own thinking. That would not only taint the historically arms-length relationship that has existed between the executive branch and the Fed chief, but it could also suck out all the positive energy currently being provided by the Fed. The prospect of replacing Mr. Bernanke is especially ironic because it would appear that replacing Obamanomics with more traditional policies might be just what our economy needs now. Have you noticed that the market seems to rally lately at the slightest hint that the president’s policy initiatives may not pass muster with Congress?

I am hopeful that Congress, especially blue dog democrats, will press the Obama administration to abandon its politics for the sake of our economy and that it will do so before our nation’s yin and yang becomes Cheech and Chong, and sends our economy and our future irretrievably up in smoke!