Obama's Economic Policy: Deny Truth

In a June 14th editorial entitled “Politicizing the Fed,” the Wall Street Journal sheds light on one of the dubious regulations of the upcoming financial reform bill. The Journal states:

The biggest underreported threat comes from Subtitle I, Section 1801 of the House financial reform bill titled “Inclusion of Minorities and Women; Diversity in Agency Workforce.” Sponsored by California Democrat Maxine Waters, the provision requires each federal financial agency, the Fed Board of Governors and the 12 regional Fed banks to “establish an Office of Minority and Women Inclusion.”

So what else is new, you say? Don’t the feds already dictate racial and gender hiring? Yes, they do, through the Equal Employment Opportunity Commission and assorted other federal laws. As a matter of racial and gender diversity, the Waters provision is at best redundant.

But Ms. Waters and the House are hunting bigger game–to wit, the political allocation of credit.

[…]

The House provision makes that very clear by making each diversity officer a Presidential appointee who must be confirmed by the Senate.The post, says the bill, will be “comparable to that of other senior level staff.” The post, says the bill, will be “comparable to that of other senior level staff.”

The law says this diversity czar will “ensure equal employment opportunity and the racial, ethnic and gender diversity” of the work force and senior management of these institutions. More ominously, this creature of Congress and the White House will also be charged with “increas[ing] the participation of minority-owned and women-owned businesses in the programs and contracts” of each agency and conducting “an assessment” of stated inclusion goals.

Mull over that one for a minute. Having recently lived through a financial mania and panic caused in part by political pressure for “affordable housing,” Congress will now order regulators to allocate credit by race and gender.

In an article I wrote on February 28th entitled “Fiscal Death by Welfare,” I argued: “I believe that as the downturn goes on the government will blame the banks for the lack of economic growth and force them to allocate credit to chosen political entrepreneurs and other bad credit risks…” I truly wish I had been wrong in my assessment.

Note that this is not to say that minorities or women are bad credit risks, but that based upon prior social engineering experiments in which government has intervened to force lending, we have seen that the worst credit risks are the ones who most benefited at the outset, to the detriment of themselves and all taxpayers at the day of reckoning.

Too, any government forcing of credit necessarily reflects a bad credit risk, because in lieu of government intervention, market actors would already properly allocate credit to anyone, regardless of their race, gender or ethnicity, at an interest rate reflective of their risk profile. If lenders were to discriminate on the basis of non-economic reasons, than other competitors would see this void and fill it. This principle is reflected for example in the old days when in response to the so-called WASP investment banks, Jews built their own ones to fill the vacuum of talent being ignored by white-shoe firms. Private self-interest works in the face of discrimination. Public self-interest creates discrimination.

Why is forced allocation of credit to certain sectors of society harmful? Forced allocation of credit means mispricing of credit which leads to market distortions that manifest into bubbles and crashes.

Interest rates are supposed to reflect the risk profile of the borrower. Lenders assess the ability of a borrower to pay back a loan and determine a proper compensatory rate based upon the opportunity cost and risk involved with leaving the cash with such a borrower over a period of time. The government by forcing the allocation of credit will not only distort the market mechanism which best coordinates lending and borrowing activity in all sectors of the economy, largely to the detriment of the most creditworthy debtors, but also artificially cheapen the cost of credit for the least creditworthy of debtors by increasing the supply of available credit to them.

In effect, the government will seek to deny the truth reflected in higher interest rates for more risky borrowers by dropping their rates by fiat. Since better credit risks will have to pay higher interest rates due to such diversion of capital, this will have a doubly negative effect on the worse credit risks who would benefit from the likely more successful economic activity of the more creditworthy borrowers.

The notion that interest rates must be kept low — that we should lie by suppressing the price of credit because it reflects truths we do not want to acknowledge is not limited to the central planning writers of the financial reform bill.

In Ben Bernanke, the chief financial central planner’s most recent performance in front of the House Budget Committee, he echoed this argument, noting that we must keep interest rates low — that we must stop the price of interest from reflecting reality or we will risk facing the consequences of reality. This of course is how he arrives at the supposed panacea of an interest rate of 0-.25%.

We have government at every level that is bankrupt, hundreds of under-capitalized banks with toxic assets on their books and an economy that is being hyper-regulated to death and facing increasing onerous taxes direct and indirect, and yet the benchmark cost of borrowing money, to which all other interest rates are connected is 0%. Utter insanity. Almost as insane as giving a body like the Fed the ability to fix such a price, as if a single human being or board of human beings could pick the price of anything, be it credit or bananas. Obama, Bernanke & Co. would rather wage a war on truth and centrally plan than go home and let prices reflect reality.

Another aspect to the denial of truth in the economy deals with the abandonment of “mark-to-market” pricing. If banks were to have to price assets on their books based upon what they could reasonably expect to obtain in the market for those assets, many of them would be in serious trouble. Yet instead, because we have suspended mark-to-market pricing, and forced taxpayers to pump capital into our banks, their balance sheets appear to be healthy. Hence the new normal in our economy of “extend and pretend,” where we throw lifelines at banks and failing enterprises by providing them with cheap capital, and pray that their now hidden underlying problems will go away, knowing that they will not only not go away but grow larger until some unknown dark point in the future when the cancer kills the host.

When it comes to unemployment too, we see an administration not only denying truth but flat out lying, laughably arguing that we are creating jobs. Leave aside the fact that the more honest measure of unemployment, U6 shows unemployment at much closer to Depression levels. The bottom line is that a government job, the only kind we are creating, is not an economically beneficial job, the caveat being the jobs of those who defend us and keep us safe who are necessary to maintain the peace that allows our economy to function. Even there, I doubt anyone would argue that in a world without foreign enemies, maintaining a military would be anything more than a diversion of funds.

In any event, the private sector creates jobs in response to the demand of consumers. Sovereign individuals dictate what sectors should grow and what sectors should contract based upon their needs. Government does not meet any such demand. It can only take resources away from the private sector and allocate land, labor and capital based upon political, not economic factors that in a capitalist economy, individuals would make to drive economic activity. The government in depriving individuals and enterprises of such economic resources will only stifle recovery, immorally attempting to play the role of the omnipotent master of consumers and producers. The government will destroy jobs by “creating jobs.”

Note too that the underlying argument that people are not consuming enough, and that thus we need such boondoggles as cash-for-clunkers and HAMP further denies truth. How is a government to know what is the proper amount of consumption? Why is the government to stop individuals from choosing to consume less? Why is government to take resources from people and consume more if individuals choose to consume less?

We overconsumed (as reflected in the unjustified rise and subsequent crash in asset prices) precisely because we were misled by gobs of artificially cheap credit, so now we need to force people to consume even more and make credit even cheaper? NO! Now we need to contract — consume less and save and invest more. Saving and investment means foregoing consumption today to consume more tomorrow. But if interest rates are artificially suppressed, disincentivizing saving, all we will do is perpetuate existing stagnancy.

Most recently, with regard to BP, President Obama is trying to use the disaster to argue that drilling for oil is bad, and that thus we need to use public money to push all sorts of green initiatives like windmills and solar energy. Forget that BP was forced to drill so deep underwater because of all of the environmental regulations we have in place that prevent us from tapping much more easily usable sources of oil. Forget that the baby-killers at BP are losing billions of dollars, again as a result of this policy, while you demonize them as if they intentionally caused this disaster. Forget that alternative sources of energy are nowhere near being perfected, nor are they yet economical, which is why the private sector is not pushing all of its resources toward such development.

When you are the central-planner-in-chief you know better than your serfs. You can deny all truth and continue to push your intentionally destructive policies, claiming that existing notions of individual liberty, property rights and true equality before the law are antiquated and immoral.

But in reality, President Obama’s economic policy of denying truth merely divides and favors certain classes of people over others and compounds and prolongs our problems. Obama seeks to supplant with the decisions of divine bureaucrats the decisions of millions of individuals partaking in mutually beneficial actions to the good of the whole world.

This administration completely perverts truth, justice and morality in their grab for greater control over you and I. Most importantly, this administration forgets the fundamental truth that man is flawed and thus cannot be G-d. What could be more dangerous and immoral than a policy which stems from such a hubristic and fallacious principle?