Not many people see similarities between U.S. President Barack Obama, the proselytizer of change, and the former guy who ran the White House, the now-reviled George W. Bush (just in case you have forgotten). But independent Wall Street economist Robert Brusca sees things different than most. And he thinks the new boss at 1600 Pennsylvania Ave. is acting pretty much just like the old one. [Obama] funnels money and changes rules to benefit friendsjust a different group of friends, Brusca notes in the current issue of Canadian Business. And this has consequences, because he has mucked up the way the whole system works and the notion of risk-reward.
Bruscas comments stem from the treatment of bondholders during the recent auto sector social-planning/bankruptcy proceedings, which ran over the rights of creditors to fast-track government bailouts of General Motors and Chrysler. Since then, of course, Obama has started mucking with his central bankers, generating a wake-like atmosphere on Wall Street. Indeed, the White House announced plans yesterday to expand the power of the U.S. Federal Reserve, a move that actually involves handing the U.S. Treasury a veto over emergency activity launched by Big Ben at the Fed.
Do we really want to have an appointed cabinet officer in our government wield that power over our so-called independent central bank? asks U.S. fund manager David Kotok, chairman of New Jersey-based Cumberland Advisors. Remember, it is the central bank that is charged with policy making to encourage low inflation and economic growth. The more politics gets into central banking, the greater the inflation risk. Politicians do not want to apply restraint. They tend to discourage higher interest rates as a tool to fight inflation. History is replete with examples of central bank policy failures while under political influence.
Furthermore, now that Washington is playing with Fed powers, the Federal Reserve Act is exposed to all sorts of political tinkering as it moves through the House and Senate. This proposal is on a fast track, warns Kotok. There will be public hearings, of course, but the decisions are being made in the smoke-filled rooms. The lobbying is already intense. We believe that the end result is coming and it is already known. The United States is extending a social-democratic form of government to the bulk of the U.S. economy. We are applying an industrial policy to finance and banking, just as we are doing to health care and autos.
We have already done this for years with the agriculture sector. The result is that we pay farmers not to farm and we get ethanol policies that starve millions of people, and we promote protectionism in sectors like sugar. Thats how industrial policies end up in social democracies. We are going to get one in banking and lending and the monetary business. The outlook is not sanguine.
Add up the expected reach of U.S. interventionist policy (on finance and banking, agriculture, autos, housing and health care), Kotok says, and you get nearly half the nations GDP under an industrial policy in the new America.
Larry Kudlow, take note, he says, free-market capitalism is dead.
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THOMAS WATSONis a senior writer, market columnist and editorial board member at Canadian Business magazine. Since winning a community journalism award as a cub reporter with the Hamilton Spectator in the early 90s, he has covered business, finance, politics and technology for various news outlets. Prior to joining CB in 2001, he reported on the steel and automotive sectors for the Financial Post. Watson received two National Magazine Award nominations for business feature writing in 2008, winning a silver award for his coverage of Canadas ABCP fiasco. He landed his first NatMag nomination for exposing a stock manipulation plot aimed at Waterloo, Ont.-based Open Text during the dot-com boom, when he headed investor relations for an international venture capital outfit in the City of London. Watson holds graduate degrees in journalism, international relations and public finance and undergraduate degrees in history and politics.