President Obama is convening a summit of CEOs at the White House, revealing a re-election strategy similar to Latin American leaders in the 1970s and 1980s, when fiscal irresponsibility ultimately resulted in sovereign debt failures.
Like those leaders, the president is borrowing too much, co-opting critics and organizing an oligarchy of the privileged to support him in 2012.
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With a 1.4 trillion federal deficit, the Treasury is printing bonds both to pay interest on existing debt and to finance a fundamental budget deficit — a $1.2 trillion shortfall between operating expenditures and tax revenues. Meanwhile, the Federal Reserve, recognizing rising rates in a skittish bond market could kill the recovery, is monetizing $600 billion of that new debt.
Call it what you like, QE2, the Titanic in the Tidal Basin or Peter crying wolf — that’s printing money to pay your bills.
The morass is caused by an economy that can’t grow fast enough to create private sector jobs that pay taxes to finance the government.
Businesses aren’t hiring because they lack customers and bank credit. President Obama and Federal Reserve Chairman Bernanke have declared that China’s undervalued currency, which creates a huge trade deficit with the Middle Kingdom and results in slack demand for what Americans manufacture, is slowing the U.S. recovery.
Those deficits on trade and in domestic demand limit growth to 2.5-3%, or barely enough to keep unemployment from rising above 10%. Any hiccup could cause a new wave of layoffs, send consumer spending tumbling and push the economy into a second recession and 15% unemployment.
This fall, President Obama declared, after frustrating talks with Chinese leaders, the United States can take steps to rectify the situation unilaterally if China does not revalue the yuan. Economists on the left like Paul Krugman, on the right like myself, and in the middle like Peterson Institute Director Fred Bergsten have offered suggestions as to how that could be done.
President Obama is shy to act, in part, because with his popularity sinking he dares not upset Wall Street contributors to the Democratic Party and executives at U.S. multinationals with large investments in China, whose criticism of the President’s anti-business bent he is busily trying to silence.
This week’s most sought invitation on the Potomac is to the CEO summit, and it will be tough to remain part of this privileged inner circle and criticize the Administration.
Souls are cheap: a photo op in the Rose Garden.
Meanwhile, the President’s financial sector rescue and reforms are a flop, because Wall Street was accommodated by Treasury and the Federal Reserve.
The too-big-to-fail banks are even bigger than before, gobbling up regional banks that provide credit to small business, which create most of the new jobs. Those regionals left standing remain crippled, hobbled by bad real estate loans. Unlike Citigroup (NYSE:C) and other big banks, whose sins Ben Bernanke forgave with cheap Federal Reserve loans.
Witness some results. As big banks monopolize smaller city markets, CD rates fall to near zero. Grandmas that rely on CDs for retirement income must dip into capital to live, while Wall Street pays out $150 billion in bonuses to a handful of financiers so “talented” they nearly threw the world into a second Great Depression.
The new derivatives platforms intended to create transparency, mandated by the Frank-Dodd Act, are being monopolized and prices fixed by a few big banks, such as JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS). Price fixing is a criminal offense but Attorney General Holder is too busy elsewhere to bring indictments that would finally break Wall Street's culture of entitlement.
Meanwhile, health- care reform has accelerated increases in premiums and drug prices, boosting health insurer and pharmaceutical company profits, even as employees of smaller businesses are losing private plans the President promised they could keep.
The big banks, multinationals, health insurers and pharmaceutical companies and big labor are shaping up to become the oligarchy of the privileged, co-opted by the President and very hesitant to support his 2012 Republican opponent.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.