Happy New Year--Tough Times Ahead

Happy New Year. January 2009 brings with it the landmark inauguration of Barack Obama. The GOP machine that has held the executive reins in Washington will yield to the new Democrat executive. Yet, what will change? Despite his occasional antiwar rhetoric, Obama has announced that he will retain Robert Gates as Secretary of Defense. So much for "change." Gates was slippery enough to avoid criminal liability in the Iran-Contra scandal. As deputy director of the Central Intelligence Agency, Gates was a belligerent influence, encouraging covert bombing raids against the Sandanista government in Nicaraugua. However, his refusal to cooperate with the Office of Independent Counsel eventually paid off for him--his endurance in stonewalling OIC investigators outlasted that office's political capital and Gates escaped mostly unscathed, although the scandal lost him his 1987 bid to become top spook at Langley.

Obama also promises to step up the efforts of the Bush administation in hemorrhaging dollars for the sake of some ill-conceived "stimulus" program, as if more wild spending could be used as an effective salve for the pains now felt from years of carefree government excess. Even worse than the monetary helicopter that Obama plans to deploy to bribe the electorate, leading voices in the new administration and in the Democrat-controlled Congress are calling for trillions more in direct and indirect bailouts for companies either too irresponsible or too outmoded to perform efficiently in modern markets. The penalties against companies like Ford that refuse to participate in such quasi-nationalization of industry will likely continue as well. A $1 trillion plan for expansion of public works projects, which was pushed in part by steel industry lobbyists, is in the works. Numbers in the trillions are hard to fathom, but a useful point of reference is the gross domestic product (GDP) of the United States, which is somewhere in the neighborhood of $12–14 trillion, if World Bank, CIA, and IMF figures are any indication.

More central the current economic crisis is the epidemic of bank failures. As reported by ABC News last year, the Federal Deposit Insurance Corporation (FDIC) has compiled a secret list of 117 banks that are on the brink of failure. After the twenty-five bank failures in 2008, the FDIC Deposit Insurance Fund has been drawn down to roughly $20 Billion. This means that the fund could be bankrupted by as few as two of three large bank failures. Despite the looming insolvency of the FDIC, Obama has decided to retain current FDIC chair and 2006 Bush nominee Sheila Bair, probably though the end of her original term in 2011. Bair, one might recall, took unprecedented steps to extend the liabilities of the FDIC by providing unlimited backing for some kinds of non-interest-bearing accounts and backing other kinds of debt issued by at-risk banks.

All of these decisions seem to indicate that Obama's inauguration represents not a refreshing change from the irresponsible and short-sighted policies of the Bush II years, but rather a continuation of those failed policies, compounded by wild new spending initiatives and more monetary expansion from the Federal Reserve. Instead of a sober period of fiscal belt-tightening, Obama appears to be suffering from the same Keynesian delusion as his predecessor—that the answer to irresponsible, wasteful spending is even more spending, including the creation of up to 600,000 new government jobs. The same mental malaise has also taken hold of the minds behind the Wall Street Journal, which on January 6 ran an article entitled "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes." While decreased consumer spending will mean slower growth, this is a good thing where we are talking about phantom growth driven by monetary policy mania rather than solid economic fundamentals. Far from "aggravating" the crisis, responsible financial decisions—choosing to live within one's means, saving, and planning for lean times ahead—are the only way to end what will otherwise blossom into America's Second Great Depression. Sadly, Washington seems set to continue on as a fount of fiscal lunacy, and the American people will suffer because of it.

(Also published in the January issue of Dicta, Suffolk Law's newspaper)