Friday, January 29, 2010

The president's anti-Wall Street rhetoric is not good for the economy, and may hurt his party politically

Bonfire of the Populists. By KIMBERLEY A. STRASSEL
The president's anti-Wall Street rhetoric is not good for the economy, and may hurt his party politically.
WSJ, Jan 29, 2010

The problem with fires is that they can blow in any direction. Consider the White House, which is seeing a backdraft from the anti-Wall-Street flame it has been dousing with gasoline.

His agenda on the ropes, President Obama made a calculated decision to pivot to populism. The Massachusetts Senate race highlighted a fed-up public. The White House strategy: Channel that anger away from itself and to easier targets. Its opening shots were a new tax on banks, new restrictions on banking activities, and Mr. Obama roaring, "We want our money back!"

The president fed the fire with his State of the Union address. Americans are angry at "bad behavior on Wall Street." It is time to "slash the tax breaks for companies that ship our jobs overseas." Lobbyists are trying to "kill" financial regulation. American "cynicism" is the result of "selfish" bankers, CEOs who "reward" themselves "for failure" and lobbyists who "game the system." (No mention of Cornhusker Kickbacks or backroom union deals, but never mind.)

For an administration that claims to know its political history, the White House appears to have misread at least one decade. FDR was re-elected in 1936 for many reasons, but among them was his fiery denunciations of "economic royalists," "economic tyranny," and "economic slavery." Business knew it was in the president's crosshairs and put its capital on strike. The economy didn't recover until the war.

Team Obama is already witnessing a repeat. The U.S. economy ought to be flying out of recession. Yet bank lending is sluggish. Companies refuse to hire. Business is going elsewhere to raise capital: China last year outstripped the U.S. as a center for initial public offerings. The market gyrates on Washington's latest political drama.

A venture capitalist recently remarked to me that the uncertainty the administration has created is "nothing short of paralyzing." Nobody will invest in an industry that might be the next to be overtaxed, overregulated, or publicly disemboweled.

Add to that uncertainty the administration's new populist bent, and it's a recipe for a continued capital freeze. "People in the economy are thinking about whether to invest or take risks when what they are seeing are early signs of Hugo Chávez economics," says Wisconsin GOP Rep. Paul Ryan. With the White House's political fortunes fundamentally tied to economic recovery, this populist fire is an act of self-immolation.

The blowback is already hobbling the White House's own economic team. Senate Democrats, following presidential example, have been newly eager to skewer their own "symbol" of Wall Street. The nearest to hand happened to be Mr. Obama's own Fed chief, Ben Bernanke. Majority Leader Harry Reid spent two weeks putting down a reconfirmation revolt, helping save Mr. Obama from his own antibank rhetoric.

In the House, Treasury Secretary Tim Geithner was meanwhile called to answer questions about AIG disclosure and counterparties. He left accused by Democrat Edolphus Towns of aiding Wall Street banks in "looting the corpse" of the insurer. Talk about a populist liability. The two men survive only as damaged goods, more susceptible to congressional pressure, less able to make tough decisions. And should Mr. Obama cut Mr. Geithner loose, the White House's tough talk narrows the pool of experienced hands it can nominate as replacements.

Policy-wise, too, the administration is boxing itself in. In keeping with the populist swerve, a feisty Mr. Obama this week upped the ante on financial regulation, warning Congress he'd veto anything less than "real reform." Yet it is precisely a stick-it-to-them bill that will have the most trouble passing a frayed Congress in an election year. And heaven help the administration if there is another financial meltdown, one that truly poses systemic risk. Could this White House dare write another bailout check to "Wall Street"?

And for what? The administration made the mistake of leaking that its new strategy was pure politics, designed to re-energize the public and put Republicans on defense. That somewhat robbed it of its authenticity. Americans have also watched this White House prop up moribund auto makers, float Fannie Mae and Freddie Mac, and cut deals with pharmaceutical companies. The bank war appears a bit disingenuous. The country's growing investor class is not impressed by the sort of business mau-mauing that pummels their 401(k)s.

As for those Republicans, they are hardly cowering in fear. They watched Scott Brown bat away the president's bank tax, explaining it would be passed on to consumers and hurt lending. His victory suggested the public is open to free-market explanations, and the GOP is feeling more emboldened to make them.

Not all populism is bad. There is indeed an anti-establishment anger in the nation. But the majority of it is directed at a Washington that is foisting an unpopular agenda on the country, and at the cavalier treatment of the free market that creates jobs. The president might try tapping into that.