The Public Policy

Banks on Welfare

Obamanomics is paving the way to financial ruin.

By 3.13.09

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In his first address to Congress about three weeks ago, President Obama tried to explain how he intends to tax and borrow the nation out of recession. Markets haven't bought it.

"Obamanomics," it turns out, is a demand-side economic strategy of higher taxes on production and trickle-down debt designed to increase consumption by putting a debt-ridden people even deeper into debt. The President also announced a gaggle of Great Economy Welfare Programs for financial institutions to implement this New Economic Policy and promised to reward bankers' bad behavior with an open-ended commitment of unlimited bailouts to keep the credit wine flowing.

He said, "It's not about helping banks; it's about helping people." According to Obamanomics, debt will trickle down from federal handouts to banks through to consumers, allowing them to run out and buy more stuff from struggling businesses. After the speech, Senator Barbara Boxer called it a "slam dunk, a home run…"

It's a strike out, and history demonstrates why. In 1981, President Ronald Reagan took office in the midst of raging inflation and a shrinking economy. He understood that the key to economic recovery and taming inflation was to stop printing money and increase the rewards for work, saving and investment to increase production, not consumption. Before people can consume, they first must produce something to offer in trade. To produce something, they must have a job or own a profitable business. In other words, to increase prosperity, production first must rise after which consumption will follow. Obamanomics has the cart before the horse.

When President Reagan cut tax rates and reduced regulation to increase incentives for entrepreneurs to work, save and invest to raise economic production and create more jobs, Barbara Boxer called the president's successful supply-side approach to economic recovery "trickle-down economics" and accused him of cravenly playing on the misfortune of hardworking Americans to reward undeserving rich people. Today, she effuses over Obama's demand-side, trickle-down-debt strategy based on astronomical bailouts to banks, insurance companies, and big businesses that would fail without government subsidies. I call that corporate welfare in the name of the general welfare. 

The same day the President laid out Obamanomics to the nation, Fed Chairman Ben Bernanke in testimony before the Senate Banking Committee tried to reassure the American public that the United States was going to get only a little bit pregnant when it crawls into bed with the big financial institutions and "partially" nationalizes them. Uncle Sam, Bernanke insisted, will not nationalize those banks; just provide them a little financial stimulation. It wasn't a week before the federal government nationalized Citi by acquiring 37 percent of its common stock. So much for respect in the morning.

Watching the Obama Administration and the Bernanke Fed in action is reminiscent of a scene half way through Ayn Rand's epic novel Atlas Shrugged when the government bureaucrat in charge of the Federal Bureau of Economic Planning proclaims, "Production is not a private choice, but a public duty. They have no right to fail, no matter what conditions happen to come up. They've got to go on producing. It's a social imperative."

Politicians and their cronies in the Financial Establishment ensure public acquiescence to endless bailouts by creating night terrors among the people of "systemic risk" that could bring total financial collapse, much as a kidnapper instills terror in the parents of what could happen to the child he holds hostage if they don't pay up. So even though polls and markets reveal a complete lack of public confidence in government's ability to fix the banking problem, people are afraid to stop the government from continuing its destructive policies.

When people lose confidence in capitalism they turn to fascism, which it precisely what is occurring before our eyes. In Chairman Bernanke's testimony before Congress, he said the government has ways other than "nationalization" to control financial institutions, and he rejected the medical metaphor used earlier by Treasury Secretary Timothy Geithner when he announced the stress tests for banks. Bernanke made it clear (and Geithner later confirmed) that the Treasury Secretary's stress test for banks is not really analogous to the strenuous test for heart disease doctors administer; it is more like a means test for welfare applied by social workers. Both Geithner and Bernanke insist it isn't a matter of whether banks pass or fail the stress tests. Rather, the assessment is intended to determine how big a bailout they are going to get from Uncle Sam. 

Here is how Chairman Bernanke described Obama's Great Economy Welfare Programs for bankers:

(i) A new "capital assistance program [a federal cash-assistance welfare program like Food Stamps] to ensure that banks have adequate buffers of high-quality capital";

(ii) A "public-private investment fund in which private capital will be leveraged with public funds [a federal matching-grant welfare program like Medicaid] to purchase legacy assets [aka worthless assets] from financial institutions"; and

(iii) A new Federal Reserve program "using capital provided by the Treasury [a government-financed, third-party, faith-based charity program] to expand the size and scope of the TALF [Term Asset-Backed Securities Loan Facility] to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well" [aka more worthless assets].

There is no doubt President Obama is a charmer and a smooth political operator. After the past couple of weeks, however, there also is ample evidence his administration has no idea what it is doing economically and is putting the nation on a course to financial ruin.

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About the Author
Lawrence A. Hunter is president of the Alliance for Retirement Prosperity.