Will Our Sickly Recovery Survive Doctor Obama?


Our nation has a bad case of the economic blues

The stock market has been taking a drubbing this past few weeks, selling off yesterday to a new seven-week low and settling below 10,000 for the first time since July 6. Anxieties about the still-weak housing sector and continued poor job growth have dialed down investors’ appetite for risk all over again. Moreover, there is a growing sense that our leaders are clueless about how to fix this mess.

Consequently, all eyes were on Fed Chairman Ben Bernanke today as he addressed a gathering of economists and academics in Wyoming. Bernanke has been hopping back and forth, nudging toward tightening one week and loosening the nation’s purse strings the next. He looks more like someone playing Double Dutch than a sound policymaker. This morning he pledged to again ramp up purchases of securities should the economy appear to be reversing gear. This came on the heels of a report that the economy slowed sharply in the second quarter, growing at a 1.6% rate. This may not have provided the reassurance the market was hoping for.

In fairness, his options are not great. Economist Alan Blinder wrote an excellent piece this week, detailing possible moves the Fed could make, concluding that none would have much impact at this point. The Fed has already (very successfully) expanded its balance sheet gigantically, purchasing mammoth amounts of mortgage-backed securities to keep rates in the sector low. Blinder suggests an interesting notion, which is that instead of paying interest on the $1 trillion in excess reserves that banks have on deposit, the Fed should instead charge a fee. His view is that, faced with such a penalty, banks might loosen their lending standards and more aggressively push money out into the economy. He also recommends encouraging bank examiners to kick back and relax a little. Current tight lending standards, a reaction to overly lax policies of the past, are not helping.

Indeed, numerous purported remedies for our ailing economy are going awry. Bernanke is flying into powerful head winds. He may have kept interest rates low – an important element in boosting our debt-laden economy – but he has no control over taxes, regulations and spending. While he was inching toward reining in the Fed’s bloated balance sheet, thus signaling to the rest of the world that the U.S. does not in fact intend to go broke, Congress pushed through more spending programs. At the same time, President Obama and his colleagues in Congress have created a regulatory tsunami, with one wave of “reform” after another. The upshot has been completely predictable unintended consequences that have unsettled industries across the board and intimidated small businesses.

Consider the Credit Card Accountability Responsibility and Disclosure Act, with which President Obama gleefully promised to bring the credit card companies to heel. Not so surprisingly, credit card companies, now unable to adjust interest rates to reflect the changing credit status of customers, have taken the obvious route of hiking rates ahead of the bill taking effect, and issuing new cards that start out with higher rates. As a result, Americans are now paying the highest premium over the prime rate in 22 years. As of a week ago, the average APR on cards was 13.7%, up from 11.6% the week before the bill was signed. That’s in the face of all-time low rates elsewhere. That’s a real accomplishment, but it is a perfect example of how this administration has operated. Credit cards had little or nothing to do with the financial collapse, but issuers are an easy target for those wanting to score populist points. Nobody likes credit card companies. They spring sneaky charges on customers and hike rates with no warning whatsoever. You can break a leg trying to get your bill to the post office on time, but still find yourself an hour late and facing whopping fees.

Still, Americans rely on easy access to credit provided by American Express, Visa and others. There are roughly 600 million credit cards in circulation, standing behind trillions in consumer spending. Even if you despise the industry’s marketing practices, this may not be the very best time to fiddle with America’s ability to shop. Moreover, the Kaufman Foundation, which studies issues of importance to entrepreneurs, has concluded that almost half of small businesses rely on personal credit cards for financing. For sure, any wobble in credit available to this sector reverberates through our economy.

The CARD Act is not the only well-intentioned but ultimately damaging bill pushed through recently. Fallout from Obamacare and the financial industry overhaul is just beginning to emerge. A year ago Jack Welch, the former CEO of GE, wrote a Business Week column cautioning that “President Obama is unquestionably taking on too much.” As Welch says, “change – breaking change like Obama is pushing – can’t just be about getting things done. It has to be about getting the right outcomes, and right outcomes rarely get sorted out in a rush.” How prescient.

No matter how mad we all are at those who sold homes to unfit buyers, and at those who borrowed unwisely, there is no excuse for upending the business practices of the nation. As Jeffrey Immelt, the head of GE and formerly one of the administration’s closest allies has said, President Obama doesn’t like business and business doesn’t like President Obama. Talk about head winds.

Editor’s Note: Liz Peek is a financial columnist.

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