Economic mess: inherited or created by O?

“The economic mess we inherited”

by Clark S. Judge, managing director, White House Writers Group, Inc.

On Sunday, Rasmussen reported amazing nineteen-point negative gap between President Obama’s strong favorable (23%) and strong unfavorable ratings (42%) among likely voters. In polling terms this deficit is almost as big as the trillion-dollar-plus one in his 2010 budget. To it, the president and administration have one response, repeated last night in his interview with Oprah Winfrey and summarized in five words: “The economic mess we inherited.”

But upon assuming office did he and his administration find an economic crisis that needed mending – or one for which everything had already been done that needed to be done to bring about a recovery? And if the latter, have their policies made things better or worse?

In February I argued (see here: http://tiny.cc/N0Cgu ) that a few simple calculations derived from Milton Friedman’s quantity theory of money pointed to an economic recovery beginning between May and September, as in fact happened.

The basic argument was that in early 2008 the United States had seen unprecedented destruction of a new kind of base money, that which was incorporated in structured financings rather than bank reserves. We were in the first bank run of the non-bank bank era. Not until September did the Federal Reserve and Treasury respond with adequate vigor. But in the last third of the year their massive injections of funds into the economy and the banking system were sufficient to offset what had been lost in the first third.

As of February, the danger was that the Obama Administration could dampen or reverse this coming upturn. How? By injecting new risk and uncertainty into the economy through, for example, mandating trade protection, increasing tax rates, diverting resources from productive private investment to uneconomical government-sponsored activities, intruding in the management of major industries, or harassing and prosecuting business people to make populist political points.

The measure of when an economy takes on increased risk is simple: lenders will lend fewer dollars for each dollar of reserves.

This is exactly what is happening now – and it will continue to happen for as long as the administration continues to drive the nation towards unimaginable levels of spending and deficits, makes the government debt crisis worse through its health care overhaul including through aggravating the Medicare crisis by adding millions more to the unfunded program’s rolls, piles new regulations and controls onto the economy and financial system, and bludgeons bankers and businesspeople to act against their considered judgment.

The president’s weekend talk about fat cat businessmen and his likely follow up performance when he and his team meet today to beat up bankers to lending more liberally could only make things worse.

It is also a negative when he talks about the immense swings in the economy in the decades before he took office. Economists term those decades the “Great Moderation” because recessions were mild and short-lived and growth was steady. To people making investment judgments based in part on whether Administration policy makes sense or not, such obvious ignorance or dissembling suggests a White House the does not care about economic reality, even enough to get recent history right.

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http://www.hughhewitt.com/blog/g/054bb42e-c9f0-4a04-b7c7-42f4c1643f7c