Is the Iron Chef in Chief Fast Tracking Another Financial Crisis?

January 24, 2010
By John

Cloudy with a Chance of Meatheads?

BBQ the Banks?

This week, a panicked American political leadership took important steps toward pushing our financial system off a cliff.    The election loss on Tuesday triggered a round-robin of recriminations, accusations and repositioning by elected politicians around the country.  And on Wednesday the President joined the chorus of confusion with a populist rant directed at the banks.  And he did it again on Thursday and Friday, deriding the nation’s financial leaders as ‘masters of the universe’ and proposing an additional $100-billion tax on certain financial transactions (this as supposed punishment for earning too much money and paying out to many bonuses, even though taxpayer monies were repaid with interest earlier this year).

Several US Senators joined the fray on Friday by piling onto the banks, Bush and Ben Bernanke.  Barbara Boxer covered herself in laurels by declining to support Ben’s reappointment in the name of ending the final ties with Bush era policies – this more than a year after Bush left town for his ranch and Texas library.  The Vermont Oracle of Wisdom, Bernie Sanders, wrote that we need a Fed for Main Street instead of Wall Street (whatever that means), and that Ben must go.  And Majority Leader Harry Reid, our ‘independent like Nevada’ guy in DC, at first expressed uncertainty about his vote on Ben, watched the markets tank (and likely got a couple calls) and promptly announced his support after the markets closed Friday evening.

And what did we get for all this noise?  The stock market dumped 5% in three days.  We’ve been put on notice by our Chinese financiers that they’re nervous.  The Europeans are endorsing the new Obama strategy because they know major parts of the industry will likely be pushed overseas if it is implemented under these conditions.  The bonuses are still being paid, and record profits will continue to roll in as long as the taxpayer continues to fund the DC-Wall Street axis (yes, they’re in cahoots – wouldn’t you take a tongue lashing by Chris Dodd for a $40 million paycheck?).  The dollar is going to get pounded this week by sudden uncertainty at the Fed, and we’re all caught in a “Cloudy with a Chance of Meatheads” downpour.

Would You Like Those Eggs Raw or Scrambled?

Why attack the financial system and the markets now?  Didn’t we just bust the Treasury to bail out these same banks and refloat the equity markets?  Didn’t we dump a few trillion into the money system to try to make up for destroyed liquidity, and open the fed window to the industry so it could book a manufactured profit?  Didn’t the President also point out in the same speeches how much we need these same ‘evil-doers’ to increase lending to small business if the economy is to recover?  Why did this happen?  Because the President needs to change the subject.  He has egg on his face from the failure of ObamaCare and a series of electoral routs, and he needs to find a new foil to blame.  And who likes those greedy mega-bankers, anyway?

It is no wonder that 77% of investors now believe (http://tinyurl.com/y8k8×2n) the President is anti-business and question his ability to manage a financial crisis.  This crass expression of pure populism was delivered to destroy value – and arguably knocked almost trillion dollars off the market cap of the NYSE.  Not just of banks – everything.  Nice work, and a great way to start a new year when some modicum of economic recovery seemed to be within grasp.

If Only He’d Done This – More Responsibly – A Year Ago…

The Rough Truth is the country would be better off restoring prohibitions against banks being involving in non-lending businesses (e.g., hedge funds, proprietary trading and investment banking, most insurance, etc.).  It would also probably be wise to make a break with the past and appoint a Fed Chairman who would defend the dollar more vigorously, and who wasn’t so willing to fund Congressional profligacy.  Re-appointing Paul Volcker at the Fed, or putting him into the Treasury slot with a strong group of young, like-minded reformers would be very good policy.   Putting some distance between the US government and the litany of bailouts and spending excesses would assuage a nervous public, stabilize the markets and still protect depositors and the dollar (they only things we should really care about as a matter of banking policy).

Or rather, these would have been good policies if they had been implemented in January 2009, when the new President could have taken such steps without being accused of acting solely to deflect attention away from policy and electoral calamity.  When the crisis was fresh and he had political capital to spend.  When the die wasn’t set, and when a fresh start was expected.

The Rough Truth is they could have been good policy in January 2010, too.  If instead of attacking the financial system, the President took pains to explain how he would undertake needed changes carefully, that he would do so at a measured but defined pace, that he would protect the financial system in the process, that he would strive to make sure the banks will have time to prepare for and maximize the value of the changes he proposed, he could have been the hero instead of a goat.  He could have installed new Treasury and Fed leaders less obsessed with their own position and political power, people with real world experience and yet who have demonstrated their commitment to the greater good of the American people.  If he had reminded us that we have already put much treasure at risk – and that we all now have an interest in keeping this patient alive – he could have made it work by acting like he was doing it for our own good, instead of his political survival

Pickles and Eggs:  Breakfast of Champions?

But now we find ourselves in a pickle.  The President has blustered like some kind of mad American Iron Chef – and threatened the industry we saved.  His Party is agitating that a new Fed leadership be installed with a view to creating yet another redistributionist scheme – this time through funny-money.  The uncertainty he has created is driving the markets down, destroying personal fortunes, and further threatens a tenuous relationship with our new lenders in Beijing.  His ill-considered actions are forcing us to protect our short-term position at the expense of long-term sanity – again.  What must happen now?  The Rough Truths are not ones I feel good about today.

  • Regrettably, we need to convince the world that our financial leadership isn’t as irresponsible as it looks.  We must confirm Bernanke for another term as Fed Chairman.  He is a very bright, if arrogant, man and is capable of playing the role passably.  The system did not collapse on his watch – although he didn’t do enough to prevent the mess in the first place.  But in his desire to get re-appointed he cut corners and closed his eyes to horrific decisions on Pennsylvania Avenue – and that dereliction leaves us exposed to yet another financial crisis or two in the coming years.  So while the markets may now need him for stability, we cannot look to him to defend the dollar or take tough stands against foolish fiscal actions.  He is a place-holder, and we need to put sound policies into place that will push the Fed into line.  Starting with a periodic audit of the Fed itself.
  • Regrettably, we need to delay plans to re-install barriers between banking and non-bank businesses.  We need to restore the market’s confidence in the banks (again) so they can continue to raise capital and sustain whatever meager lending they are doing, protect our deposits and keep the funds flowing.  Fixing the banks was Obama’s calling, and he largely ignored it in his first year.  Now he threatens to waste the trillion-dollar sacrifices already made for his own political skin.  He must return to the issue in six months or a year when the waters have calmed, and show us he’s as smart and wise as we were told he is.
  • The embarrassment of the Fed and the fecklessness of the President mean we must look to Congress to protect the nation’s credit.  We have nowhere else to look for now.  And that hasn’t happened very often since the Continental Congress sat in Philadelphia and helped lead a rag-tag army to victory over the redcoats.  Congress must find the wisdom to recognize how its actions and words are destroying wealth and job-creation at every turn.  It must bring spending to heel, and show some sense and consistency on regulatory and tax policy.  The call this week by two Democrats to extend the Bush tax cuts is a good, if hilarious, start.  The call by three other Democrats to take away the EPA’s power to regulate exhaling (CO2) is encouraging.  But there are 530 other Congresspersons who need to be brought along for the ride.
  • Our hammer is that there is an election in 9 months – and we will have an opportunity to punish those who would destroy us.  Will this be an 1894 election – when 130 irresponsible Democrats were washed from power in a national wipe-out?  Who will we put in their place?  What values and experience will they bring?  Will we replace one set of crony capitalists with another, or will we stop throwing lawyers at problems requiring resolve around core values and elect people with sense and judgment?  Shame on us if we don’t find the wisdom to do the latter.

One last thought today.  Can you imagine if we really had passed ObamaCare, and that this was how major health decisions were made?  Thank God for favors, large and small.

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One Response to “ Is the Iron Chef in Chief Fast Tracking Another Financial Crisis? ”

  1. JoJoTo4 on January 24, 2010 at 9:31 pm

    When we take the time to look back at what our elected officials have done in the past 20 years, it doesn’t add up to be much. Now that our economy has taken a hit, they are brought out of the shadows into the light and have to explain what there up to. Well they have done nothing, so they start an idiot war, throwing dummy hand grenades at each other, lighting up the other guy, all the while hoping we don’t see what there really doing, nothing! Maybe instead of electing politicians, we should treat them like sports stars an put a performance clause in their contract. You don’t perform see you later! Get rid of the lobbyists, take out the hush money and let them do the job! But what do know, I’m Joe The Plumber and there’s nothing to plumb in this town! Thanks a lot!

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