The President, Congress, and Fed Fail to Take Charge of an Economic Recovery

Posted by Michael A. Kamperman on June 24, 2009

Yesterday, President Obama acknowledged the unemployment rate is likely to exceed 10%.  He was asked at his press conference if more action was necessary to boost the economy.  He said the stimulus plan still had a ways to run and he wanted to wait and see if the actions taken so far are enough to restore the economy.  The Congress is bogged down in energy reform, healthcare reform, and financial regulatory reform and has simply taken its eye off of the economic ball.  That has left the Fed as the last line of defense to battle the economic depression.  But the Fed has yielded to the bond vigilantes worried about renewed inflation from quantitative easing.  The Fed has decided to take no further action at this time and will wait and see how the economy and the markets respond.  What is significant about the Fed’s lack of action is their own reading of the economy is inflation is not a threat in the near future and they expect commodity prices to moderate and respond to supply and demand imbalances.  Additionally, the Fed does not see an economic recovery taking hold yet.  It only sees the rate of economic decline slowing.  My biggest complaint is the Fed has gone on hold because it is confused by the trading actions of speculators, not because it anticipates a potential V-shaped recovery and a resurgence of inflation.  Washington has now officially signaled this week that they are on the sidelines and are willing to wait and watch before taking further action.  Since the President already anticipates a 10% unemployment rate, it is reasonable to assume that a significant impetus for further economic action will have to wait until the unemployment approaches 11%.

If one looks back at the severe U.S. recessions of 1973-1974, 1980-1982, or the milder recessions of 1991 or 2001, then one would see that a V-shaped economic recovery did occur.  So my take is Washington doesn’t think it’ different this time.  They have bought in to the rhetoric that the risk of a deflationary depression is now off the table.  Why?  The economic collapse can be traced directly to a crash in the non-government asset-backed securities market that relied upon the credit rating agencies.  This market fueled the shadow banking system that was responsible for providing over 70% of the credit needs of the U.S. in recent times.  This market remains broken and the commercial banks have not increased lending despite the TARP and the increase of reserves provided by the Federal Reserve. 

Perhaps if they got out of Washington and talked to small business people rather than think tank economists they would actually hear what is happening on the ground in this economy.  The consumer accounts for 70% of U.S. economic activity.  The consumer is facing rising unemployment and still further tightening credit standards.  Reports from realtors are that strict new guidelines for appraisals from Fannie Mae and Freddie Mac are killing multiple potential sales transactions.  Unfortunately, Washington seems to believe that our economy should rely much more on manufacturing, exports, and consumer savings.  The only problem is they have yet to answer the question increase exports to whom?  Today, the Swiss government intervened in the currency markets to drive down the value of their currency against the dollar.  The world doesn’t want to lose export market share to the U.S.  The Fed should have upped its program of quantitative easing today.  The President and the Congress should be focused on fixing the broken credit markets before they try to tackle long-term issues such as healthcare reform, energy reform, or financial regulatory reform.  Because a lack of further needed action from Washington the possibility of a 1930’s deflationary depression is not only still on the table, it is the probable outcome.