One of the reasons recessions turn into depressions is that people hesitate to commit their capital to new investments due to uncertainty. Right now credit is tightening up because people do not know the true extent of bad loan losses. It is unknown who is suffering losses and to what extent. The zeitgeist is one of panic and confusion.
One of the absolute worst things our government can do right now is to create more uncertainty. And yet that’s exactly what Obama is doing on multiple fronts. The problem is in trying to figure out how Obama’s bailouts, tax increases, changes in regulations, and modifications to social programs will affect businesses.
Many health care stocks are down because of fears of new government restrictions and mandates as part a health care overhaul. Private student loan providers were pounded because of the increased government lending role proposed by Obama. Industries that use oil and other carbon-based fuels are being shunned, apparently in part because of Obama’s proposal for fees on greenhouse-gas polluters [NOTE: greenhouse gases are not pollution!].
The obvious expectation is that Obama’s actions will harm all of these industries. But nobody can have a firm estimate of how badly Obama’s programs will damage the industries in question because nobody knows what legislation will pass. Why commit your precious funds to a particular investment that could be wiped out with a new law or a bureaucrat’s whim?
I see an economic stalemate forming, just like during the Great Depression when people with capital hesitated to invest it due to massive uncertainty.
Obama’s endless bailouts are also creating massive uncertainty. Investors are staggered by the sums being alloted and are wondering where the money will come from. Inflation seems to be the most likely way to finance them. Of course inflation devalues a currency and the plausible specter of it creates additional uncertainty.
Many deficit hawks also worry that the trillions of federal dollars being doled out by the administration, Congress and the Federal Reserve could sow the seeds of inflation down the road, whether the measures succeed in taming the recession or not. The money includes Obama’s $3.6 trillion budget and the $837 billion stimulus package he signed last month.
So in addition to creating uncertainty with tax increases and new programs and regulations that threaten to strangle entire industries the “stimulus efforts” are creating uncertainty in our currency.
The best thing for our government to do would be to get out of the way and let the market sort out the winners and losers. Let the insolvent entities go bankrupt and separate the healthy parts of banks from the cancerous divisions. Of course this is not a painless process and the bailout recipients are heavily invested in lobbyists.
At least some Republicans are recognizing that eternal life support is short-circuiting the market feedback. Republicans will be back in power but they first need to rediscover their free market roots. A fantastic quote from Senator John McCain:
“The best thing that could probably happen to General Motors, in my view, is they go into Chapter 11,” Senator John McCain said on the “Fox News Sunday” program today.
The automaker could reorganize and renegotiate its labor contracts to come out “stronger, better, leaner,” McCain, from Arizona, said.
Why couldn’t McCain have said this during his campaign? [In my opinion one of the worst things McCain did during his presidential run was to "suspend" his campaign and throw his full support behind the TARP bailout]. Bankruptcy was created for a reason. What Obama doesn’t seem to understand is that bankruptcy is not synonymous with liquidation. Just because a company goes bankrupt does not mean that it will no longer exist.
At this point everyone who is paying attention knows that Obama is a socialist. He is a very dangerous man- he’s an idealist with an immense amount of power who has never tempered his plans against the constraints of reality. The question (and source of uncertainty) is, how far will he be able to enact his agenda? That is the fundamental unknown.