U.S. economy to weaken further on rise in White House political populism.
Explained in a previous article, the U.S. economy, and in particular the labor market, will continue to underachieve if politicians in Washington continue with interventionist, growth-killing economic policies. Moreover, markets deride high levels of uncertainty, and since the U.S. government’s reaction – late 2007 – to the present economic downturn the markets have subsequently experienced increasing levels of government-made uncertainty.
From sporadic bailouts of government-favored institutions (present and past), to proposed national health care and cap-and-trade bills (among other forms of tax increases), propping up homes prices, and recent protectionist trade measures, markets have been exposed to an extraordinary amount of uncertainty in addition to the bursting housing bubble (which government eagerly played a significant role in). Subsequently, each additional government-imposed measure of uncertainty further delays the very necessary market [self-correcting] process.
Over the past week, the Obama administration has called for further interventionist economic policy measures under the guise of reforming “old practices” and the prevention of past “irresponsible behavior.” The administration is succeeding, however, only in increasing the government’s role in prolonging full economic recovery; if passed by Congress, both the Financial Crisis Responsibility Fee and Financial Regulatory Reform (as currently proposed) will fail to stabilize sound future economic growth.
On January 14th, President Obama proposed a Financial Crisis Responsibility Fee (read, tax) on the largest U.S. financial institutions as a means to recovery the initial $700 billion Troubled Asset Relief Program – TARP. “My commitment is to recover every single dime the American people are owed,” spoke the president. If passed by Congress, the fee would be assessed on financial institutions holding “more than $50 billion in assets.”
One certainly lacking aspect of current economic policy is a responsible “commitment to the taxpayer.”
The Financial Responsibility Fee in its current proposed form is a [punitive] corporate tax that will simply get passed along to banking consumers, thus further curbing attractive loanable funds. In fact, in the president’s speech he acknowledges how important these targeted financial institutions are to the U.S. economy, although the unintended consequences from his proposal remain a non-concern. “Now, the fact is these financial institutions are essential to our economy. They provide capital and credit to families purchasing homes, students attending college, businesses seeking to start up or expand,” stated President Obama. A tax on these institutions will discourage, not encourage consumers to seeking credit as the cost of capital increases as a result.
The Financial Responsibility Fee will increase the “much-feared-in-Washington” effect of shrinking available credit to main street (i.e., small businesses).
President Obama additionally, in his press conference speech, expressed abhorrence toward the “hue and cry from Wall Street suggesting that this proposed fee is not only unwelcome but unfair.” The claim of unfairness, however, is a valid concern. Not all of the TARP money went to financial institutions. GM received a portion of the TARP funds but is exempt from the Obama administration’s proposed recovery fee.
Moreover, the president clamored, “We want our money back, and we’re going to get it.” Seemingly taking the Michael Moore populist approach over sound economic policy (economic policy that would have erred on the initial TARP program and subsequent government bailouts).
This week, the administration is proposing a financial reform policy that would limit the size and scope of financial institutions. “In the coming weeks, the President will continue to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too Big to Fail,” released the Office of the Press Secretary.
What the White House fails to report is how the mentality of “Too Big to Fail” derived from previous Washington economic policies (such as those still in place for Fannie Mae and Freddie Mac, the same GSEs also exempt from the proposed Financial Responsibility Fee), and it is the Federal Reserve System’s easy money policies that have allowed financial firms to “use cheap money to trade for profit,” words used earlier today by the president.
The long and short of America’s economic dilemma; as long as Congress continues to force financial regulations to work hand-in-hand with politically popular campaign promises (i.e., affordable housing), the initiative for implementing “beneficial consumer safeguards” will perpetually fall short.
If the aforementioned economic policy proposals become law, the U.S. economy, and labor market in particular, will continue a very slow-growth process – even facing an increasing likelihood of falling backward. While political populism du jour may help those who currently retain political power in the short run, the aggregate U.S. economy is certain to be made far worse off in the wake of such fallacious economic policy directives.