Economic uncertainty as a political weapon

You have to hand it to the House Republicans: they have outplayed President Obama in almost every respect on the deficit-ceiling debate, but primarily in their use of economic uncertainty as a political weapon.  Republicans have set the terms of the debate, while Obama did not respond, analyze, anticipate, and attack months ago.

The president did not try to frame the debate, or lead the country to set the terms of the debate.  He did not anticipate how sophisticated, yet simple, the Republican plan against him was, and he did not counteract it before it blossomed into the near-fiasco we are facing now.

Consumer confidence and business confidence are key to uplifting an economy burdened by recession and shock.  This was the state of the U.S. economy at the end of 2008, when George W. Bush left an economic mess for Obama to clean up.  This confidence is invisible, but if it is eroded over time, people and businesses don’t invest, don’t create jobs, and don’t take risks, even if they have the money.  They hoard their cash.

After we weakly climbed out of recession with the emergency measures adopted by Obama immediately after he took office (some of these measures had been initiated by the Bush administration), I knew we were at the point where the economy would either gain momentum, or lose steam and fall back to some version of the disaster at the end of the Bush administration.

If we gained momentum, we would create more jobs, and the temporary measures which added to the deficit would be a historical footnote since the economy would grow fast enough to reduce the deficit in relation to the size of our economy.  But if we didn’t, then we would be saddled with the ‘temporary deficit,’ and a lack of jobs, and a weak economy, and Obama would surely not be re-elected.  Since I voted for Obama, I was rooting for the economy to improve, and expand, over the past two-three years.

During these past two-three years, however, I noticed something interesting.  I’ve read the New York Times and Wall Street Journal every day for decades.  I want different perspectives; I want to consider different voices.  But whereas the editorial page of the Journal has always been conservative, at least fiscally, if not socially, the front page and news pages have been a mix.  But in my opinion, not anymore.

With every slight uptick in the economy over the past two-three years, whether it was on jobs, or corporate profits, the front-page Journal articles were relentlessly negative.  Sometimes on the same story, it seemed as if I were living in two realities: what the Journal reported —the economy is awful under Obama, we are going nowhere, these corporate profits are illusory— and what the Times reported— we may be turning the corner, banks have recapitalized, companies are flush with cash.  Was the Journal being too pessimistic, or the Times too optimistic?

You could pick your facts to support either side, and that’s my point.  But why would anyone want to ‘talk down’ the economy?  I even imagined that perhaps the new Journal owner, Rupert Murdoch, had placed the kind of editors who would undermine confidence in the American economy under Obama.  But perhaps I was being too paranoid, I thought.  But I also knew such a relentlessly negative spin on anything that might improve the economy would also have an effect on whether individuals and companies spend money, even modestly, to grow us out of the deficit we incurred after we cleaned up the mess Bush left behind.  Most people in business read the Journal.

Obama didn’t help himself by focusing on healthcare reform, instead of jobs, eighteen months ago.  He didn’t help himself by not recognizing that House Republicans, after last November’s election, did not trust him absolutely, assumed he was a traditional, even radical liberal, and would not work with him.  They want him out.  Period.

As an old friend pointed out to me this summer, perhaps Obama was too young when he became president.  Too inexperienced.  Too much in belief of himself, instead of recognizing what effect he had on others, particularly on a white middle-class seeing the livelihoods slip away for their children, while this country becomes more Latino, more Asian, more Muslim, while American corporations react to globalization by shipping jobs overseas, for more profits which their investors (often ourselves) demand.

If Obama had recognized the unique ways in which he would never be trusted by House Republicans, and perhaps a great swath of the American electorate, he would have ‘triangulated,’ à la Bill Clinton, before or certainly after last year’s election.  That just means Obama would have acted as a fiscal conservative to counteract the (reasonable and unreasonable) prejudices of these Republicans and that part of the American electorate that would never trust him.  In that way, Obama would have positioned himself for reelection, in the middle of the road, which is how you win elections in this country.

When Obama ordered our Navy Seals to kill Bin Laden, that was a perfect moment of ‘triangulation’: the quasi-Muslim American president, who may or may not have been born in Hawaii, killed one of America’s greatest enemies.  You could sense when that happened that Obama’s harshest critics even tipped their hats to him, and perhaps for a moment reconsidered their zealous opposition to everything Obama.  That moment put Obama in a new light.  The problem is that Obama did not have, or aggressively pursue, enough of these ‘triangulation moments.’

If he had done that, if Obama had recognized that a significant portion of the American electorate and these adamant, inflexible House Republicans were already painting him as a stick-figure liberal who will only explode the deficit any chance he gets, Obama would have acted differently, and set the terms of the debate.  He would have gotten out of Afghanistan and Iraq, and pointed out the huge waste of hundreds of billions of dollars on defense spending, while our allies spend so little and ride our coattails.  He would have attacked government waste seriously, and closed unnecessary departments (but not the ones helping the disadvantaged or the needy).  He would have repeatedly pointed out how certain American companies pay so little in taxes, because they have sweetheart tax breaks from Congress.  He would have recognized that Fannie Mae and Freddie Mac played an important role in the housing bubble that led to the financial crisis at the end of the Bush administration, and how Republicans and Democrats both benefited from their political and economic ties to these companies.  Everybody in Congress was greedy when it came to Fannie and Freddie.

But Obama didn’t do any of the above, relentlessly, day after day, ahead of the curve, so that he wouldn’t be boxed in later.  He allowed House Republicans to set the terms of the debate, and responded only to what they wanted, and simply kept giving in to their demands.  And they have just kept saying no.

What I think is rarely pointed out is this: by passing this temporary, short-term increase in the debt ceiling, with deep spending cuts and another vote in early 2012 on the debt ceiling, House Republicans are using economic uncertainty as a political weapon.  The more uncertainty there is in and about the American economy, the fewer jobs will be created.  The more economic uncertainty there is in and about the American economy, the more the stock market will languish, or even decline.  And of course, the more the government is contracting before the election, the fewer jobs and services will exist in 2012.  The fewer jobs in the American economy, and the worse off Americans feel about their economic prospects, the better the 2012 elections will be for the Republicans.

They have outplayed Obama, and now here we stand on the brink of default.  We will all pay a huge price for these selfish political games.  When we ‘talk down’ the economy, when we lose our AAA credit rating, and when the dollar’s role as a reserve currency erodes, we all lose.  What happened to ‘us’?  Why are we not a ‘we’ anymore?  Who could be that transformative, adaptive figure who can still lead us to change for the better, while still making us believe we belong together as a country?

Burning Down Your Own Neighborhood

The bill passed by the House last week, to tax ninety percent of bonuses for any employee making over $250,000 who works for a financial institution receiving more than $5 billion in bailout funds, will be a self-imposed financial disaster that will increase the chances of a deep economic recession becoming a depression. It may make the demagogues in Congress feel good, and the legions suffering in this economy may jump for joy that they are sticking it to the bankers, but all of us will wake up the next morning amid the burning ruins. Let me count the ways.

1) The legislation does not only penalize the tiny fraction of AIG employees in the financial products division, mostly in London, who took on enormous risk and have brought AIG to its knees; it also penalizes tens of thousands of employees from at least eight major U.S. banks who had nothing to do with this mess.

What are those employees doing? They are not spending because of their fear of what Congress will do next; they are leaving the banks we badly need to be healthy; they are taking fewer appropriate risks in their businesses, like making mortgages to individuals and loans to companies, because they don’t know what the idiots in Congress will do next.

2) Many banks will be forced to return the TARP money, to avoid being burned at the stake by Congress. Nancy Pelosi will be happy- we get the taxpayers' money back! But these same banks, the ones that can survive returning the bailout money, will restrict lending to save capital, just at the moment when we need for them to do the opposite. The banks that don’t return the bailout money will be targeted as weak banks, and expect many of them to fail and fall further into the clutches of the government. Anybody remember what a run on the banks looks like? It isn’t pretty.

3) The House legislation rewards foreign banks with a competitive advantage. Deutsche Bank isn’t a U.S. company targeted by the House legislation, but it operates a big investment banking unit in New York City. Guess where all the best bankers from Bank of America, Citibank, and Goldman Sachs are sending their resumes? Instead of keeping the best bankers to clean up the messes of a few, we are driving away the talent, and decimating our American banking system. Why doesn’t Congress focus on why AIG bailout funds made whole foreign banks that exploited loopholes in European legislation on derivatives? Oh, I forgot. That requires thinking, and actually being productive, not just livid.

4) The U.S. government owns AIG, we lent AIG most of the bailout money (yes, that’s true: it’s mostly a loan), and the vilification embodied by the House legislation destroys the value of AIG. Who in their right mind would now buy the assets of AIG? Yet selling AIG’s assets is the primary way in which taxpayers will get their money back. Killing AIG, rhetorically and financially, is only hurting ourselves again. It’s stupid.

5) The House legislation will hurt New York City the most. Many of the tens of thousands of employees of major U.S. banks targeted by the House bill work in New York. Bonuses are the way people in the financial industry have been paid for years, from high profile bankers to analysts out of college to secretaries. If anything like the House bill becomes law, expect NYC to teeter that much closer to bankruptcy. New York sponsors of the House bill, Charlie Rangel and Steve Israel, and Senate supporter Charles Schumer, you should be ashamed of yourselves. Maybe some good ol’ boys will be secretly thrilled at the prospect of watching these Yankees suffer, but remember the 1970’s: the nation stagnated, and what happened in NYC was mirrored in the rest of the country.

The ways in which the House legislation will hurt all of us do not stop at five. You can’t run any business with Congress changing the rules every week. You don’t inspire confidence in foreign investors of U.S. Treasury securities when you have a Congress legislating out of revenge, instead of focusing on new, tough, permanent legislation to regulate the financial industry so that these problems do not happen again. You do not turn the corner in the bear market in stocks by attacking everyone who makes money.

Even if our anger is justified, even if it is wild, we should focus on why we allowed trading in certain derivatives to go unregulated, why the SEC was not aggressively enforcing current laws and investigating financial fraud, and what legislation creates new, tougher rules for banks and other financial institutions while allowing them to do business that will help our economy prosper.

Or, we can burn down our own neighborhood, watch the flames in the night, not caring who is in the burning buildings, or whether they had anything to do with our justifiable anger. But remember, we will all wake up tomorrow morning, more sober and perhaps less angry, and we will have to walk through the smoky rubble to buy our groceries. If the grocery store is still standing.