Washington's biggest names – from President Bush to Ben Bernanke
to Nancy Pelosi – have all trotted out publicly this week to
declare their profound concern about the American economy. Alas, our
leaders are promising to do everything except what might really do some
good: Abandon what they've been doing for the past year.
When the financial market turmoil hit last August, the U.S. economy was
growing, albeit slowly, with moderate inflation. Washington has since
embarked on a stampede of easy money from the Federal Reserve,
nonstimulating tax rebates from Congress, and a crisis-driven,
haphazard approach to credit market triage.
The result a year later: The overall economy is still expanding, albeit
slowly, but with inflation roaring and the dollar hitting historic
lows. Soaring oil and commodity prices – the byproduct of a weak
dollar – have tanked the airlines, the car companies and trucking
firms, cattlemen and hog farmers, among many others. Meanwhile, the
financial mess rolls ahead, having spread from Wall Street to the
midsized banks, and engulfing even the government-chartered companies
that Washington only weeks ago declared were our saviors, Fannie Mae
and Freddie Mac.
It's not exaggerating to say that the world is fleeing the dollar in
what amounts to a global run on Washington itself – from Capitol
Hill to the White House to the Federal Reserve. The world's investors
are saying they lack confidence in U.S. leadership.
That's certainly true of the Fed, where Mr. Bernanke looks increasingly
like a professor shocked to find that the world has rejected his
academic theories. Yesterday's dreadful inflation numbers are as stark
a repudiation of Fed policy as you could imagine: up 1.1% in June
alone, 5% for the last 12 months, the highest in 17 years. Energy and
food prices led the way, as every American consumer already
understands. But the report showed that inflationary expectations are
also creeping through more of the economy, including services and
transportation.
Mr. Bernanke stated the obvious when he told Congress Wednesday that
inflation "is too high." And markets rallied even on the hint of a
tougher line, with oil and gold both falling as the dollar rose. Yet
Mr. Bernanke, Vice Chairman Donald Kohn and Governor Frederic Mishkin
– the Fed's three intellectual amigos – continue to pursue
a reckless policy of negative real interest rates with no change on the
horizon. For months, they have overestimated the risks of recession
while underestimating the dangers of inflation. They have been too
attentive to the pleas of Wall Street and Capitol Hill, and not enough
to the American middle class.
Meanwhile, Congress wants to double down on its failures, with Speaker
Pelosi proposing a second round of "stimulus" spending. Someone should
ask what happened to the first. Just as critics predicted, the rebate
checks gave consumer spending a short-term fillip without changing
longer-term incentives. The checks did, however, add $168 billion or so
to the federal deficit. And now the Speaker wants to add $50 billion
more – all as a prelude to next year when she'll claim we need to
raise taxes to reduce . . . the deficit.
While Barack Obama campaigns on "change," the irony is that for the
past year Washington has been pursuing his economic policy mix. The tax
rebates and spending were his idea of "stimulus," too, while he's said
nary a discouraging word about the Fed or the dollar. The left's
leading economic gurus – Larry Summers, Robert Rubin – have
also urged the Fed on. With the huge tax increases he's proposed for
next year, Mr. Obama's policies are another source of the global run on
Washington.
As for the Bush Administration, the best one can say is that it looks
tapped out. By agreeing without a fight to January's tax rebates, Mr.
Bush gave up his last chance to shape this year's economic debate. He
might not have won in Congress, but he would at least have had an
argument. Instead, he told the American people that the rebates would
spur growth, and now that they haven't he's undermined the popular
appeal of tax cuts more broadly.
The President could still play a role in crisis financial management,
such as reforming Fannie and Freddie. But he seems to have abandoned
that field to Mr. Bernanke and his Treasury Secretary. Hank Paulson has
been an expert at media relations, and the Members love him on Capitol
Hill. He and the Fed have done some creative work on emergency
financing through the Fed's discount window. But Mr. Paulson has also
invited the dollar's fall as a way to boost exports, despite the
resulting oil spike and collateral damage to Detroit and American
consumers.
The Treasury chief is also still behind the curve in cleaning up the
financial system. The Fannie Mae debacle caught him by surprise, and he
still hasn't triggered the Federal Deposit Insurance Corporation
Improvement Act to prepare for the inevitable bank failures. With more
IndyMacs on the way, this is the kind of advance financial plumbing
that would help restore confidence.
For all of this blundering, the miracle is that the U.S. economy has so
far avoided a recession. Housing prices will find a bottom eventually
– all the faster if Congress doesn't pass its current housing
bailout. Parts of the economy are showing remarkable strength, as
Intel's earnings showed this week.
The main problem is political, and intellectual. Washington has spent
the last year running from the stable dollar and pro-growth tax
policies that have marked most of the past 25 years. In its waning
days, the Bush Administration has lost its will and bent to Congress's
agenda while staying silent as the Fed has encouraged a damaging
inflation.
There's an opportunity here for John McCain, if he has the wit to seize
it. He could describe how Washington has lost its Reaganite moorings on
the dollar, taxes, spending, and the corporate socialism of Fannie Mae.
He still may not win the election. But educating voters about this
collective Washington failure, and then separating himself from it by
pointing in a new direction, may be his only chance.
