The Fed’s decision last week to resume monetary easing with Quantitative Easing 3 (QE3) is unprecedented in both its timing and duration, and is a clear indication that our economy is in dire straits. It is a direct contradiction to the assertions from President Obama and former President Clinton that our economy is on a slow path to recovery. Who should you believe, politicians trying to eke out a win for their party, or Fed head Ben Bernanke, a leading expert on the economy and the Great Depression?
Ironically, the move by the Fed may actually help re-elect President Obama. The flood of new money expected will increase real estate and stock market prices and may create the illusion that American wealth is increasing and that the economy is indeed recovering. However, all that new money will also devalue the dollar and thereby increase the cost of oil and other dollar-denominated commodities, which costs will increase headwinds for the recovery.
The re-election of the President is also likely to dampen the prospects for a long term recovery too, as the President apparently intends to “stay the course” and continue policies that have thus far failed to produce meaningful economic growth. In addition, given the President’s apparent inability to work with congress, it is unlikely that there will be the required entitlement, regulatory and tax reforms needed to affect meaningful reductions to the budget deficit and the national public debt, reductions necessary for a sustained and long term economic recovery.
Ben Bernanke certainly knows all that. So why would he announce QE3 now and risk politicizing the Fed with presidential politics? Why risk causing the re-election of an incumbent President who has thus far proven ineffectual in spurring an economic recovery? Why not continue a “ready to act when necessary” posture that has kept markets stable for the past several months?
Cynics believe Mr. Bernanke’s move was a deliberate attempt to re-elect the President, so he too can keep his job, which is certainly safer with a second Obama administration than it would be with a Romney win. However, given all the recent evidence of a global economic slowdown, it is just as plausible that Mr. Bernanke fears that without the swift, decisive and unprecedented action he took last week, the US economy would be risking a major economic backslide sometime this fall. In that scenario, it is understandable that Mr. Bernanke would be unwilling to wait to act and even be willing to risk assisting the re-election of the President. Further, he would be risking the long term success of his own QE3 program and long term recovery in order to stabilize the economy during the economically significant last quarter of the year.
Friday, September 21, 2012
Monday, September 17, 2012
President Clinton's TV Ad Needs a Reality Check
Bill Clinton’s TV ad supporting President Obama’s re-election is ironic on so many levels, but it grossly distorts reality too. Clinton says that republican policies under the Bush administration is how “we got here” and that the only way out is to continue with “President Obama’s plan.” So far I have not heard a plan for the future; his convention speech was a plea for Americans to “rally around his goals for the future,” which certainly is not a plan and sounds as though he wants us, collectively, to do his job for him.
As for how we got here, President Clinton says it’s Wall Street greed and republican policies, but there are other major reasons banks ran wild and the housing market boiled over, which the former president knows intimately. First, under his watch, Glass-Steagall was repealed; that was the banking law enacted during the Great Depression designed to explicitly prevent the banks from venturing into high risk businesses that could bring about their demise. Second, under his watch the Community Redevelopment Act, originally enacted under the Carter administration was aggressively advanced during his presidency, and encouraged banks to make home loans that did not meet traditional underwriting standards.
President Clinton says President Obama inherited an economic mess from President Bush, which is true, but history also shows that he himself passed a declining economy along to Bush in 2001. The stock market, a leading indicator of the economy, peaked in early 2000 and was on a clear downward trajectory by Bush’s inauguration, and completely capitulated after the events of 9-11, during President Bush’s first year in office.
Probably too much weight for our nation’s economic prosperity is attributed to the policies of presidential administrations. In recent history great economic success came from a republican and democrat president, Reagan and Clinton, who clearly set different economic agendas and visions for our nation, but each had one major trait in common, namely the ability to work with the opposing party in congress.
Going forward the most important lesson of the Clinton legacy for this president is the fact that Clinton’s success came mostly from his second term in office, when he reached across the aisle and decided to work with republicans. This president has thus far been unwilling or unable to do that and regardless of where the fault lies for that fact, it’s the president’s job to make that happen and get things done. If he is unable or unwilling to do that, the prognosis for a successful second term can not be encouraging.
As for how we got here, President Clinton says it’s Wall Street greed and republican policies, but there are other major reasons banks ran wild and the housing market boiled over, which the former president knows intimately. First, under his watch, Glass-Steagall was repealed; that was the banking law enacted during the Great Depression designed to explicitly prevent the banks from venturing into high risk businesses that could bring about their demise. Second, under his watch the Community Redevelopment Act, originally enacted under the Carter administration was aggressively advanced during his presidency, and encouraged banks to make home loans that did not meet traditional underwriting standards.
President Clinton says President Obama inherited an economic mess from President Bush, which is true, but history also shows that he himself passed a declining economy along to Bush in 2001. The stock market, a leading indicator of the economy, peaked in early 2000 and was on a clear downward trajectory by Bush’s inauguration, and completely capitulated after the events of 9-11, during President Bush’s first year in office.
Probably too much weight for our nation’s economic prosperity is attributed to the policies of presidential administrations. In recent history great economic success came from a republican and democrat president, Reagan and Clinton, who clearly set different economic agendas and visions for our nation, but each had one major trait in common, namely the ability to work with the opposing party in congress.
Going forward the most important lesson of the Clinton legacy for this president is the fact that Clinton’s success came mostly from his second term in office, when he reached across the aisle and decided to work with republicans. This president has thus far been unwilling or unable to do that and regardless of where the fault lies for that fact, it’s the president’s job to make that happen and get things done. If he is unable or unwilling to do that, the prognosis for a successful second term can not be encouraging.
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