Obama Hope or "Epic Ruin"?
by Donald Devine
Issue 126 - February 18, 2009

The headlines tell the story about the stimulus. “Wall Street slams Obama plan with sell-off.” “Jobless claims highest in 26 years.” “CEO departures break record.” “The worst Dow Jones average in 113 years.” “Majority say stimulus could make matters worse.” The Obama hope seems to be fading fast.

Friends were shocked when these columns suggested that President Barack Obama just might have the temperament and pragmatism to avoid the leftist trap leading him into prolonged fiscal irresponsibility and an historic economic depression. Could he become the first post-New Dealer, we asked? Unfortunately, even this early in his tenure, it is obvious the answer is a resounding “no.”

By his fourth day as president, it was clear that Mr. Obama could not control the extremists in his own party by demanding that solving the financial crisis be priority one. That day he agreed to a House Speaker Nancy Pelosi devised stimulus package of over $800 billion that was clearly not targeted at stimulating the economy but was a mix-mash of goodies aimed at state and local government, health care, education and other Democratic constituencies for simple political gain – merely to satisfy pent-up liberal wishes over the past 25 years for more government.

At the same time, the president announced full implementation of the so-called fuel mileage standards and reconsidered California’s even stricter auto requirements, which by choosing leftist environmental extremism over automobile company profitability, guarantees that Detroit will become a permanent economic basket case and a perpetual drain on scarce government resources. To further demonstrate his ideological purity, he gratified his allies on the most sensitive of the social issues by overturning the ban on Federal funds for overseas groups promoting abortion, certainly a critical spending matter during a depression, no? To make his point even more, once the stimulus plan was safely adopted, the president issued an Executive Order requiring the spending be done by more expensive union labor.

Poor Mr. Obama; he is trapped by his party’s and his own (perhaps weaker) ideological presumptions. Take the housing “bubble” and the resulting financial crisis. How did this happen? Once upon a time ordinary people understood that individuals desiring a home should be able to pay for it. But enlightened Progressive ideologues decided they could make people happier by requiring that mortgages be “affordable” for those who could not afford them. This is called taking care of people, seeing them as victims of happenstance, being compassionate to the helpless. So, they backed government-supported Fannie May and Freddie Mac with artificially lower rates so that they came to dominate the mortgage business and then, spurred further by Congress, created an enormous “affordable housing” market by forcing lenders to increase “sub prime” mortgages offered to those who could not afford them.

Obviously, the mortgages failed and brought the financial house down with them. Even at Congressional hearings after Freddie and Fannie crashed, Senate Banking Chairman Chris Dodd was still insisting that affordable housing should not “suffer” as a result. He reiterated his commitment to the Community Reinvestment Act of 1977 that compelled banks to make loans to poorer borrowers and the 1993 Clinton Administration expansion to force even more risky loans, allowing Fannie and Freddie to hold just 2.5 percent of reserve capital compared to 10 percent for banks to cover emergencies. Even to this day, both Congress and Mr. Obama seem unaware or more likely blinded by ideology regarding the genesis of the very crisis they are trying to solve.

The leftist worldview consists of three actors - the evil rich, needy victims and virtuous government. So the mortgage market was destroyed by greedy speculators, rapacious bankers and crafty real estate salesmen taking advantage of the poor victims. But real life is not so simple. Take Lady Subprime. Here is how liberal Washington Post columnist Richard Cohen described her.

May I now suggest, at least for the duration of the current recession, a new feminine emblem of our times: Marvene Halterman of Avondale, Ariz. At age 61, after 13 years of uninterrupted unemployment and at least as many years of living on welfare, she got a mortgage. She got that mortgage less than two years ago. She got it even though at one time she had 23 people living in the house (576 square feet, one bath) and some ramshackle outbuildings. She got it for $103,000, an amount that far exceeded the value of the house. The place has since been condemned.

A private lender compassionately-named Integrity Funding made the “affordable” loan but quickly sold it to “Wells Fargo & Co., which sold it to HSBC Holdings PLC, which then packaged it with thousands of other risky mortgages and offered this indigestible porridge to investors. Standard & Poor's and Moody's Investors Service took a look at it all, as they are supposed to do, and pronounced it triple-A." But this was not some scam but the normal Freddie/Fannie/government-backed process to help the poor obtain mortgages they could not otherwise obtain. Sure, smarmy lenders, investment brokers, banks, and favored ratings agencies took advantage of the process but they certainly were following the government agencies’, Congress’ and the presidents’ desires to make loans available to those who could not afford them! Marvene and many in the middle class also were not simply innocent victims but were trying to get something for nothing too, accepting no down payment terms as free or subsidized housing and then dumping the mortgages afterwards.

The “progressive” solution to these problems in the so-called stimulus bill was to spend even more to help people and banks obtain or keep much, much more of what they cannot otherwise afford. Because Democrats control the presidency and both houses of Congress, the non-stimulus stimulus bill easily passed an additional $790 billion in spending that the Treasury followed up with an additional $720 billion in loan and asset guarantees, on top of the Bush $700 billion troubled asset and $736 billion bank guarantees – all aimed at keeping the mortgage and credit markets from clearing out the bad borrowers and allowing the market to hit bottom – and, incidentally, guaranteeing that it will not recover.

The Republicans in the House did vote unanimously to oppose the non-stimulus stimulus bill as did all but three GOP senators. Yet, as President Obama quickly responded, after the several trillion dollar stimulus, bailout and other spending sprees under President George W. Bush that the GOP mostly supported earlier, Congressional Republicans are “not credible” on the spending question. Unfortunately, he is right, although they did put the party firmly in opposition for the future.

To be credible on the bailout plans, a Republican must have spoken out publicly while Mr. Bush was still president. A few members of Congress and a very few Republican governors did oppose the Bush plan but the only one who was in print in major newspapers, on television and even testifying before Congress against the whole bailout mentality beforehand was Mark Sanford of South Carolina. Gov. Sanford made the case factually and on principle. He started with the real problem, spending and massive government financial obligations, even before the bailouts. “ Our nation is at a precipice. We’ve stacked up more than $56 trillion in government promises made but not paid for -- meaning we as a nation owe more than American families’ total net worth for the first time in history.”

The first part of the solution, Sanford argued, is to not make that dire situation worse by borrowing more. “Rather, in the short term, the new President and Congress need to recognize one simple truth: When you’re in the hole, quit digging.” Instead, Washington insisted on spending and borrowing trillions and trillions more.

Leaving aside for one second the absurdity of trying to fix a problem caused by debt by stacking still more debt on top of it, if $7 trillion in stimulus hasn’t moved us closer to a solution, how will spending even more help?

This debt - fueled further by Treasury guarantees and Fed printing of money - will lead to an inflation that “could well lead to the largest confiscation of wealth the world has ever seen,” Sanford warned. The Fed has doubled its borrowing reserves from $900 billion to $1.8 trillion. Even if the economy revived in spite of the stimulus, is it conceivable that this president would allow this liquidity to be absorbed and quash his recovery? The best case outcome of the Obama Plan is a recovery followed by unprecedented inflation. More likely, the economy will remain flat together with hyperinflation, repeating the stagflation of the late 1970s in a much more virulent form. “Staying on the path we are on will lead to a financial train wreck of epic proportions,” Governor Sanford predicted.

The public tends to agree with him. A recent Rasmussen poll reported that 50 percent say the stimulus plan could make the economy worse. Gov. Sanford’s solution is “a major financial de-leveraging” that requires markets to hit bottom so that they can work their way out of the poor policies of the past. “It will be painful,” he concedes, but there is no magical solution. Pumping up bank and financial institution lending will only lay the seeds for even worse inflation – and economic stagnation too. The only way forward is to reduce present and future national government spending, which will only be compounded as the baby-boom generation retires and sets off a literal entitlement spending explosion in as little as five years.

The only good news about the Obama Administration’s economic policy is that there is going to be a real world test of these two contrasting philosophies. History suggests the economy should recover by early 2010. If it does, President Obama can claim success. Either President Obama will succeed with more government spending and regulation and the nation will prosper as a result or at least one governor will be proven right that economic reality cannot be ignored without drastic consequences.

Donald Devine, the editor of Conservative Battleline Online, was the director of the U.S. Office of Personnel Management from 1981 to 1985 and is the director of the Federalist Leadership Center at Bellevue University.