Abyss could deepen again

The Washington Times Weekly - - Commentary - Don­ald Lam­bro

Adeepening pes­simism is tak­ing root in the Amer­i­can econ­omy as job­less­ness rises in­ex­orably to­ward 9 per­cent, busi­nesses are fail­ing, U.S. ex­ports have tanked and Wall Street is in a de­pres­sion.

Bil­lion­aire in­vestor War­ren Buf­fet de­clares the econ­omy has “fallen off a cliff,” and sees re­cov­ery fur­ther off than ever. Economists talk gloomily of a long re­ces­sion fol­lowed by years of ane­mic growth as the once-mighty global econ­omy shrinks for the first time since World War II.

The ad­min­is­tra­tion’s plans to bail out fail­ing banks, buy worth­less toxic as­sets and “jump start” a list­less econ­omy now seem tame in the face of a dawn­ing re­al­iza­tion that the fierce fi­nan­cial in­fec­tion is far more sys­temic than they had first imag­ined.

Global eco­nomic an­a­lysts here now talk of bank fail­ures in the tril­lions of dol­lars, dwarf­ing the rapidly de­plet­ing $350 bil­lion in TARP res­cue funds that the Trea­sury has at its dis­posal. The Fed­eral De­posit In­sur­ance Corp. is rais­ing its pre­mi­ums on the na­tion’s banks to re­plen­ish its shrink­ing fund at a time when many banks are too weak to pony up more money.

Pres­i­dent Obama’s hon­ey­moon, if he ever re­ally had one, is be­ing cut short by new crit­i­cism from Wall Street, Repub­li­cans and Democrats in Congress and, in­creas­ingly, the busi­ness com­mu­nity.

In­vest­ment strate­gists com­plain that Mr. Obama dis­misses Wall Street’s piv­otal role in the econ­omy’s re­cov­ery as he plans to raise taxes on the very in­vestors the coun­try needs to boost stock prices and un­lock risk-cap­i­tal to re­fi­nance a cash-starved econ­omy.

“The re­sult has been a cap­i­tal strike, and the re­turn of the fear from last year that we could face a far deeper down­turn,” the Wall Street Jour­nal said in an ed­i­to­rial aptly ti­tled “The Obama econ­omy.”

Lead­ing Wall Street an­a­lysts, fear­ful of crit­i­ciz­ing the ad­min­is­tra­tion this early, have now be­gun to speak out more brazenly. I asked David Wyss, chief econ­o­mist at Stan­dard & Poors, the in­flu­en­tial Wall Street re­search and fore­cast­ing firm, whether the mar­ket‘s plunge was a sign of no con­fi­dence in the White House’s re­cov­ery plans. He quickly replied, “Yeah, I would say.”

“Part of it is they [Wall Street] feel there’s no there there,” Mr. Wyss told me. “They don’t have [fully worked out] plans. They are still in the for­ma­tion stage. Th­ese guys have been there 45 days, but he promised to hit the ground run­ning and it’s more like they landed up to their knees in ce­ment. A lot of the ce­ment was left there by the pre­vi­ous ad­min­is­tra­tion.”

“I don’t think Obama has done the great­est job,” he said.

There is also a grow­ing be­lief that Mr. Obama is push­ing too many do­mes­tic spending ini­tia­tives at once, at­tempt­ing to em­u­late Franklin Roo­sevelt’s whirl­wind 100 days. While the stock mar­ket was tank­ing, the job­less rate was go­ing through the roof, the econ­omy was crit­i­cally ill, strate­gic posts at Trea­sury were un­filled and the White House was hold­ing a sem­i­nar on health-care re­form. “You’ve got to con­cen­trate on the econ­omy first,” Mr. Wyss said.

Repub­li­cans and some Democrats have also be­gun to ques­tion the “too big to fail” strat­egy that the ad­min­is­tra­tion re­fuses to aban­don. “We should have a much more ag­gres­sive strat­egy” to­ward bad banks, “rec­og­niz­ing that they are bro­ken and sell­ing them off,” said Brook­ings eco­nomic an­a­lyst Bill Gale. “Alan Greenspan said noth­ing is too big to fail. In some cases there is no rea­son to keep them in play.”

There is a more fun­da­men­tal weak­ness in Mr. Obama’s re­cov­ery plans — and that is his de­ci­sion to use the eco­nomic cri­sis as a means to ex­pand so­cial spending at the ex­pense of needed tax in­cen­tives to foster growth and in­vest­ment.

Econ­o­mist Harm Band­holz at Unicredit Re­search faults Mr. Obama for do­ing “noth­ing to stop the fall in the stock mar­ket, noth­ing di­rectly,” adding that “without the sta­bi­liza­tion or re­cov­ery of the stock mar­ket, the U.S. econ­omy won’t be able to get out of this re­ces­sion.”

What should he do? “Cut cap­i­tal gains taxes,” Mr. Band­holz replies.

But Mr. Obama and his eco­nomic ad­vis­ers are propos­ing to raise cap­i­tal gains taxes on in­vestors to as high as 20 per­cent, a move that will crip­ple the level of cap­i­tal in­vest­ing needed to refire the na­tion’s sput­ter­ing en­gines of growth.

Throw in the ad­min­is­tra­tion’s pro­tec­tion­ist in­ten­tions to re- shape ex­ist­ing trade pacts and re­strict fu­ture trade agree­ments, and you have a recipe for slower eco­nomic growth in the years to come.

Still, as dark as the econ­omy may now seem, there are still rea­sons to be bullish in the long term. The Amer­i­can econ­omy re­mains as re­silient as ever, with one of the most pro­duc­tive work forces on the planet. Hous­ing prices are fall­ing along with mort­gage rates and the dream to own a home is still very much alive.

We’ve over­come wars, de­pres­sions, re­ces­sions and wrong eco­nomic poli­cies be­fore and we will do so again. We may be down now, but we al­ways come back.

Don­ald Lam­bro, chief po­lit­i­cal cor­re­spon­dent of The Wash­ing­ton Times, is a na­tion­ally syndicated colum­nist.

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