Jason

As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. Yesterday the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama's policies have become part of the economy's problem.

Americans have welcomed the Obama era in the same spirit of hope the President campaigned on. But after five weeks in office, it's become clear that Mr. Obama's policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence -- and thus a longer period of recession or subpar growth.

The Democrats who now run Washington don't want to hear this, because they benefit from blaming all bad economic news on President Bush. And Mr. Obama has inherited an unusual recession deepened by credit problems, both of which will take time to climb out of. But it's also true that the economy has fallen far enough, and long enough, that much of the excess that led to recession is being worked off. Already 15 months old, the current recession will soon match the average length -- and average job loss -- of the last three postwar downturns. What goes down will come up -- unless destructive policies interfere with the sources of potential recovery.

http://online.wsj.com/article/SB123604419092515347.html

Fourth Stooge

The problem with this is it assumes this is a variation of typical recession. It's not. There is no accepted definition of a depression, but we are in one by many reasonable definitions. The forces that led to this go back a minimum of 10 years. Actually, to trace all the causal factors you need to go back about 40 (arguably longer). But by in large, the last 10 and specifically the period from 2002-2003 sealed the deal.

The decision by the Fed to reduce the federal funds rate to 1% and hold it there for a prolong period allowed an already growing housing bubble to expand beyond the point of no return. Essentially they were creating money out of thin air in the name of making homes affordable by lowering mortgage interest rates. They got one thing right: interest rates went down. But homes were no more affordable because home prices rose at unrealistic rates because of the glut of demand. Had the qualifications necessary to obtain a mortgage remained realistic, there would have been less of a problem. But, among other things, in 2003 Bonzo pushed the FHA to lower or remove the down payment requirement to “bring the American dream of home ownership to more Americans.” It did alright, to those who would not normall qualify and for good reason.

Couple all that with the borderline blackmail that the regulators were using from at least 1998 (probably earlier) through Bonzo's administration to ensure lenders were providing loans to “disadvantaged” borrowers. Specifically, they were examining lending rates to blacks and Latinos. I'm not the least bit prejudice, people either qualify or they don't. I don't think color or heritage should impact the process one way or another. The funny thing is the implication of discrimination did not take into account that lenders were loaning money to a higher percentage of Asians than any other group. The reason: they qualified.

Add the fact that Fannie Mae and Freddie Mac were buying loans off lenders, giving more cash to lend. Fannie and Freddie then sold the mortgages in packages to investors as mortgage-backed securities, if not in default credit swaps. It was a no risk situation to the lenders. They could take more risks because they were almost immediately offloading the risk of their bad decisions on the taxpayers. Who got the loans with the cash Fannie and Freddie pumped in? Those who did not qualify in the first place. Think of it this way: If the NFL suddenly allows teams to keep five additional players on the roster, those slots are going to the last five players who failed to make the team under the old rules. Same for lending.

Then came the meltdown. Foreclosures rose, hitting those who bought mortgage-backed securities (thinking they were safe, thanks to irresponsible rating services), the taxpayers (through Fannie and Freddie default credit swaps) and then the taxpayers again through Bonzo's original $700B bailout and now Obama's $800B giveaway.

Rest assured of this: the meltdown is not the result of a Democratic or a Republican policy. It is the result of policies of both. Cheap credit, earmarked economic programs, the law of unintended consequences and horrid monetary policy. The bailouts (both and all future) only serve to prop up institutions that have done their best to fail, and will fail. You can keep the life support on AIG as long as you like but the patient isn't going to take another breath on its own. Same can be said for GM. Merrill Lynch was all but dead until the government basically paid BofA to take the corpse.

Had the government stayed out of this (mortgages to everyone with a pulse), the bubble would not have built. But they got involved under both Carter and escalated it under Clinton. Then, under Bonzo, the Fed was enticed to avoid a recession at all cost (given Greenspan's philosophy, that didn't take a lot of enticing). The straw that broke the camel's back was the extended period of 1% federal funds rates. The evidence: M3, the sum of all money (including small and large time deposits, bank accounts, CDs plus anything else that can have repayment demanded) expanded from about $450B in 2000 to nearly $750B in 2007. By the way, the Fed conveniently stopped publishing M3 in March 2006, but the number is still available elsewhere.

Letting things fail would have been painful. But looking at the institutions that did actually fail, anything of value was scooped up by other organizations and life continued. The fall would have been harder but hitting bottom and the start of a recovery would have been quicker. Instead, we are going to bury ourselves by trying to preserve the past.

This is not just the Obama economy. Where the newly printed money is going may be specific to him. The fact that newly printed money would be given to somebody crosses administrations and party lines. It is Keynesian economics, and it is the only thing our braintrust knows. The only Congressman I am aware of that does not espouse Keynesian theory is Ron Paul, who is of the Austrian School of Economics. There may be others, but rest assured Obama, Biden, McCain and Palin are not among them.

The question people should be asking, regardless of their political affiliation, is how those who missed the warning signs and denied there was a problem, even when the fat began to hit the fire, could possibly be qualified to find a solution.