PrintMarch 4, 2010
Bad News Bair
A report released from the Federal Deposit Insurance Corporation suggests that economic recovery may not be as swift or robust as hoped. As the FDIC's director Sheila Bair admits, the report does not support the president's insistence that recovery is just around the corner. Bank lending, a key ingredient of economic expansion, fell last year at the fastest rate since 1942. This dramatic decline in lending is attributable in part to President Obama's unrelenting attacks on the private sector.
The dramatic fluctuation of the recent business cycle, with its unsustainable expansion of residential and commercial mortgage borrowing and sudden collapse of values, can be attributed in large part to misguided policies on the part of Congress and the Federal Reserve. At the urging of Washington, mortgages were offered at will to millions of borrowers who should never have received them. An extended period of zero interest rates fueled expansion of commercial real estate as well. It was a lot like urging a friend to join in a night of binge drinking and then blaming him for showing up late for work the next morning. Except in this case, the friend had not been "urged," but forced to binge.
American banks are still dealing with the painful hangover resulting from the near collapse of the credit markets in October 2008. Ms. Bair estimates that over seven hundred banks may well fail in the foreseeable future. While larger banks have stabilized, thousands of smaller community banks are still dealing with the effects of underwater loans. These community banks are the same ones that make loans to small businesses, and such loans are not being made at present.
This news does not bode well for a rapid and vigorous recovery. Banks in the process of strengthening their balance sheets are not eager to extend new loans, and businesses facing an uncertain future have little reason to expand their borrowing.
The irony is that Ms. Bair and her boss President Obama are pressing banks to expand loans to small business, though why the administration should wish to see an expansion of small business remains a mystery. It is a common myth that a large majority of new jobs are created by small businesses, so perhaps the president is unaware of the critical role of companies with over fifty employees. Perhaps the president simply likes the sound of the words "small business." Whatever the reason, he has demonstrated in every way possible his antagonism to the kinds of businesses that employ most Americans.
The crucial question is this: Why should any business, large or small, wish to invest the capital necessary for expansion within a climate of extreme tax and regulatory uncertainty? The administration's position on a host of major issues from health care reform to cap-and-trade shifts from day to day. Just this week, the president has come out with an even more ambitious -- and onerous -- health care plan. At the same time as he announces his new "comprehensive plan," he proposes to modify it through discussions with congressional leaders of both parties.
This sort of fickle and unprincipled governance -- governance by haggling and huckstering -- has been going on for over a year, and it shows no signs of ending. The president has demonstrated his willingness to throw any company (AIG, WellPoint) or any economic sector (Big Insurance, Big Oil, Big Pharma) under the bus if it suits his short-term goals. How can he expect the business community to jump up and start borrowing on his instructions?
There is an extraordinary disconnect between the president's urgent desire that more jobs magically appear and his willful blindness toward the manner in which jobs are actually created in the private sector. Whether Ms. Bair and other administration officials share this blindness is unclear, but it is certain that their boss is indifferent at best to the decisive role of capitalist enterprise in American civilization. It is as if the president believes that American corporations are supposed to create jobs for him out of thin air, with no expectation of profit or even of their own survival. Echoing this line, Ms. Bair asserts that the larger banks "need to step up to the plate" and start lending -- this at the very moment when they are being castigated by Congress and the president for excessive lending in the past.
If Obama wished to see the creation of more jobs in the private sector, he would be proposing legislation that would make it possible for them to operate in a stable and profitable manner. This legislation would include a reduction in corporate tax rates, permanent adoption of the Bush tax cuts, elimination of the death tax, health care reform that reduces burdens on business rather than vastly increasing them, a rejection of cap-and-trade legislation, broad tort reform, and an end to pro-union card check legislation. Yet the president supports none of these pro-business, pro-growth positions. How can he expect banks to begin lending and businesses to begin borrowing and expanding in the face of government policies designed to reduce their competitiveness?
Wherever American businesses are encouraged to expand, they will do so. Unfortunately, what that means is that companies such as Exxon-Mobil, Proctor and Gamble, and IBM are now expanding more rapidly in Asia and Latin America than in the United States. It is no accident that a significant number of American companies have begun to relocate to Ireland, Switzerland, Singapore, and other business-friendly locales. In other cases, businesses are simply hunkering down, preserving capital, and avoiding new investment. Meanwhile, Obama blusters and bullies, and Ms Bair laments the fact that businesses are not borrowing as they should.
Dr. Jeffrey Folks taught for thirty years in universities in Europe, America, and Japan. He has published many books and articles on American culture and politics.
