With Obama, It's Another Day, Another Dolor
Coupled with a second proposal to restrict the trading activities and proprietary profit of the banks, it should come as no surprise, to cite the Reuters report, that “stocks suffered their worst one-day percentage drop since October,” with the Dow Jones falling over 200 points. The bank tax is unconscionable; the directive against proprietary trading, a practice referred to by economists as a “moral hazard” -- since the banks are presumably gambling with their clients’ savings while themselves being largely insulated from loss -- would make some sense if it were the case. It is not. Obama does not seem to have understood that there is a distinction between a bank, whose activities are controlled by law, and a bank holding company, which uses its own funds in securities dealing. As Peter J. Wallison, co-director of the American Enterprise Institute for Public Policy Research (AEI) explains, there are “strong firewalls” between the two which “prevent the activities of the holding companies from affecting their bank subsidiaries.”
Of course, the president’s stated intention to crack down on “obscene bonuses” handed out by financial firms to their own employees is a sound populist gesture -- except that firms such as Goldman Sachs have already decided to cut down on such excess by awarding compensation packages to their top executives in stock with a five-year selling moratorium, rather than in cash. But the important fact is that the timing of this flurry of new banking regulations coming out of Washington is suspect. The administration’s focus on the banks now, in the context of the current PR scramble, raises serious questions about the president’s political calendar as it does about the future of American banking. Given what Victor Davis Hanson calls Obama’s “serial demonization of finance and business,” the long-term outlook is no less discouraging than the fiscal palpitations of the day.
No matter. In the president’s attempt to buff his tarnished image, which took another hit after the Democratic loss in the Massachusetts Senate election, he has chosen to impose a fiscal operating tariff on the very institutions whose effective functioning and increased liquidity are essential to their rejuvenation. To quote from Tim Harford’s analysis of political tampering with the economy in The Undercover Economist, this is a species of “government banditry,” combined with “widespread waste and oppressive regulations.” Cynical as it may sound, Harford allows there may well be dark motivations at work behind such manipulative practices, as politicians “often trade off the public interest against their chances of reelection” -- a truism worth remembering. In so doing, to adapt one of Harford’s agricultural metaphors, politicians have a way of turning meadowland into scrub. Inefficiency and self-interest reign, but the twist is that it is passed off as a public boon.
One does not need a course in freakonomics to discern the veiled determinants behind such uber-political behavior. One merely needs to keep one’s eyes open. It should be admitted, however, irrespective of the damage that must inevitably ensue, that the current melodrama has been most cleverly scripted. The defender of the people will smite those nasty bankers and greedy Wall Street speculators with yet another series of decisive blows, thus refurbishing his credentials even as the real money supply continues to dwindle and much-needed supplementary investment grows ever scarcer. The fallout from these latest interventions, as with the majority of its similitudes -- e.g., the proposed cap and trade or the imminent “new” Medicare payroll tax -- would be adversely felt throughout the banking quarter, the economy as a whole, and the public domain that Obama is ostensibly sheltering.
Indeed, the situation is even grimmer than might at first appear. Confiscating capital from American businesses and banks while simultaneously cranking out vast quantities of unbacked fiat money is a sure path to financial collapse. As Milton Friedman warned in Money Mischief, “The fate of a country is inseparable from the fate of its currency.” And it is inseparable, too, from the fate of its financial institutions.
Still, many people will be fooled by the president’s ostensible bona fides and his leftist base will be reassured. But the bottom line is that there is less juice in the system, less flexibility in its armature, and less willingness on the part of the nation’s wealth producers to adventure forth. So much for fabled Yankee dynamism and geoeconomic impetus. So much for the inner cowboy, for risk, energy, and initiative, that for long defined the American way, as Obama -- apart from printing money like crazy -- acts to restrain the potential vigor of the economy by placing it under swelling burdens of tribute and tying it up in knots of regulation.
Clearly, the purpose of so desperate yet wily a set of proposals, involving ever more taxes and restrictions, is not to augment a depleted treasury or retrieve the nation’s former solvency but to inflate the president’s sinking poll numbers. In pursuit of his goal of eventual re-electability and his palpable desire to introduce a deeply troubling socialist program into national life, the president will try to appeal to voters as a compassionate egalitarian. And he may well succeed in his objective. But its effect will be to add another nail to the coffin that the undertaker-in-chief is preparing for his country.