Politics above economics: Obamanomics
Obamanomics \ oh-‘bah-ma-‘nom-ix\ n (2009): the act of promoting a political agenda using economic scare tactics, unqualified personnel, rhetoric and hubris, generally accompanied by hope and desperation as substitutes for competence and good ideas.
ObamaCare is hopefully dying a slow death but Obamanomics appears to be with us for at least the next three and a half years. Unfortunately, the policies of the Obama administration are determined by people who do not understand the most rudimentary economic principles. Instead, those policies are borne of a political philosophy that not only runs the nontrivial risk of ruining our economy and our currency, but is also antithetical to the economic engine that has built America.
Big TARP’s little envelope
Regardless of which administration is in power, government actions always have unintended consequences and ultimately are counterproductive. First came the loans to big money center banks through the TARP program. These financial giants were too highly levered already. Government’s solution was to give them even more debt. The whole program appeared to be designed on the back of an envelope — a small envelope at that. In its haste to do something, even if it’s wrong, Congress passed the TARP program to show the American people they were “on top of the crisis” and to further ensconce Big Brother in our lives. President Obama reminded us every day that “there is no disagreement that we need action by our government” despite the fact that the renowned Cato Institute in Washington, D.C. took out a full-page ad in The Wall Street Journal denouncing that supposed “fact,” an ad that was signed by hundreds of professional economists. Our president is also exceedingly fond of reminding us that this is the “worst economic crisis since the great depression” which, though possibly true, is only meant to garner support for his form of governance.
Of course, it is human nature to want something for nothing. Only after other firms and industries lined up at the trough (GM, Chrysler, AIG, etc.) did the Obama administration realize they had to put some restrictions on the funds, the so-called “stress tests” among others. The big lenders were losing money because they had invested heavily in mortgage backed securities being sold by Fannie Mae and Freddie Mac which were now defaulting. Also, these companies could no longer buy lenders’ mortgages, so mortgage credit dried up, even for credit-worthy customers. Who created these mortgage giants? Government. Why were firms investing so heavily in them? Everybody was, including Wall Street brokers and investment bankers who now, too, were also in trouble. So we had to bail them out as well.
But Fannie and Freddie are safe, you say. At least that’s what House Financial Services Chairman Barney Frank thought when in 2008 he said, “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under. I think they are in good shape going forward.” This quote was just a few days before both of these giants went insolvent. This is the same Barney Frank who refused to reign in these government sponsored mortgage buyers in 2003 when President Bush and Federal Reserve Chairman Alan Greenspan warned Congress of their dangerous condition. Frank even urged them to make more sub-prime loans at that time.
Meanwhile, both the Bush and Obama administrations usurped our financial markets and decided which executives and companies would remain and which would not. Rick Wagoner of GM; out. Bank of America’s Ken Lewis; out. Lehman brothers was allowed to fail but for some reason unknown to the public, the Treasury department arranged for Bear Stearns and other financial institutions to be bought … or else! Instead of taking proper action to avoid the “too big to fail” problem, the end result is even greater concentration of economic power creating, yet again, another counterproductive outcome.
Next came the stimulus package of about $800 billion. Even this wasn’t enough to help the liquidity crisis in the mortgage markets so more intervention ensued. This time, instead of the focus being on institutions, it was primarily directed toward lower wage earners. TARP funds were tied to the performance of institutions in not foreclosing on properties, in essence creating a moratorium on foreclosures. Not knowing when they might receive at least some money for properties against which they had a lien, lenders refused loans even to credit worthy customers. Instead of allowing such investors to provide liquidity by buying properties at distressed prices, the government by edict created a situation where financial markets were not even permitted to help with the crisis. Most recently, this focus on helping the supposed disadvantaged gave us the “cash for clunkers” program. When it ended in late summer, car sales of American automakers generally fell between 40 percent and 50 percent for the month of September. All the program did was postpone the increase in unemployment.
During this period, the rhetoric got out of hand. In an infamous display of gloves-off political oratory and ego, White House Press Secretary Robert Gibbs said CNBC correspondent Rick Santelli “didn’t know what he was talking about” after Santelli railed against the ridiculous economic logic of the foreclosure moratorium. This “wisdom” from Gibbs, a political science graduate from North Carolina State University (NCSU), against Santelli, a former executive with investment banking and other financial firm experience, was particularly disturbing. What exactly does a political science major know about economic logic that a financial executive doesn’t? Since I have two degrees from NCSU, I think that’s how many Mr. Gibbs and I should have between us. Treasury Secretary Timothy Geitner also jumped on the rhetorical bandwagon when he told banking executives they “better get with the Obama program.” Or what, Mr. Secretary?
Politics above economics. What Obamanomics has given us is a $1 trillion to $2 trillion dollar increase in the national debt, the specter of inflation to come (and it will come), a “jobless recovery,” a much-divided America and a dollar whose value is falling fast. In brief, I have no faith whatsoever in the leadership of the Obama administration or its supporters. The best I can hope for is a one-term presidency.
Dr. Deryl W. Martin is Professor of Finance at Tennessee Technological University. A native of North Carolina, he received his bachelor’s and master’s degrees in economics from North Carolina State University and his Ph.D. in finance from Texas A&M University.
