David Frum:
Comments Email Twitter inShare.1.David Frum Aug 9, 2011 – 9:49 AM ET
If I were Standard & Poor’s, I’d be damn embarrassed. On Friday, the famous bond-rating service took the momentous step of downgrading the sovereign debt of the United States of America, a country that has paid interest on its loans punctually since 1789. All weekend, the world awaited market reaction. On Monday, the markets did react: with an explosive rally in U.S. Treasury bills. Now that’s a repudiation.
As bond markets soared, stock markets tumbled, and for the same reason.
Actual market players have become terrified of the risk of a second tumble into recession, a bookend to the collapse of 2008-2009. They are selling equities and scrambling for the safety of U.S. Treasury debt.
But whereas the crisis of 2008-2009 originated in the United States (in a mortgage market that went berserk in large part because ratings agencies like Standard & Poor’s prostituted their reputation for fees to give sub-prime mortgage instruments a higher rating than they now assign the debt of the United States), this new threat is gathering over Europe.
In the overheated politics of Washington, everything is subsumed into domestic politics. If markets rise, Washington wrangles over whether President Barack Obama or the Tea Party should get the credit. If markets tumble, Washington argues whether President Obama or the Tea Party deserves the blame.
But this weekend’s crisis seems more driven by fears over the future of the Euro than anything else. The European Central Bank has now been obliged to intervene to support the bonds not just of little, absorbable Greece, but of Spain and Italy. Markets have reason to fear that if the U.S. banks that crashed in 2008 were too big to fail, Spain and Italy may be too big to save.
Earlier in the summer, market-watchers hoped for good things from 2011. The second quarter reported healthy corporate profits. The July jobs report — though not marvellous — seemed good enough: more than 150,000 private-sector jobs created in the month, offset by a decline of 37,000 public-sector jobs. (Despite Tea Party rhetoric about Mr. Obama’s remorseless drive to expand government, public-sector employment has shrunk by some 500,000 since 2008, the biggest decline in civilian public-sector employment since the Second World War.)
But that good news was offset by other and more dismal tidings. The U.S. economy is growing slowly, way slower than after previous nasty recessions like 1982 or 1974. Total output still has not caught up to 2007 levels. At current trends, employment will not catch up to 2007 levels until sometime after 2014, probably even later.
The grim economic news makes Washington’s obsession over deficits and debts look kind of beside the point. Today, the U.S. government can borrow money for 10 years at 2 1/3 %. It can borrow money for two years for less than a quarter of a point. Markets do not fear inflation, they do not doubt America’s credit. What they fear is recession and deflation. But nobody has a plan these days to deal with that. The U.S. Federal Reserve has more or less thrown in the towel, given up on monetary stimulus. The Republican majority in the House of Representatives wants spending cuts, not fiscal stimulus. Even President Obama at his press conference Monday declared that he felt renewed urgency about the debt problem. It’s a real testament to the power of Washington conventional thinking that it can coerce even a president to declare that up is down, day is night, and that today’s non-problem is actually today’s supreme problem.
But look: Barack Obama is in a hell of a spot.
He bet his presidency on an array of bold measures in 2009 to slow the economy’s fall. They succeeded, sort of. What might have been a second great depression was cushioned into a mere very nasty recession. Through 2010, his administration declared recovery at hand. That too was true, sort of. The economy has been growing since the summer of 2009. But the recovery has been weak, fitful and interrupted. Things have stopped getting worse, but they are getting better so slowly that they might as well be standing still.
Mr. Obama’s defenders argue that he is the victim of reckless, nihilistic, obstructionist Republicans. There’s some truth to that too, sort of. The Republicans have behaved very badly. (My suggestion for the GOP slogan in 2012: “Vote Republican. It’s just too dangerous to have us in opposition.”)
But Mr. Obama’s problem is that Americans do not want a victim president. They want a president who can solve problems, deliver results and overcome opponents. Mr. Obama has failed on all those counts. Republicans are slavering over the opportunity to punish his failure at the polls in 18 months time. If the economy does sink — or if Republican can succeed in sinking it — they may get their chance, even with the weak field of presidential candidates they have to show. And meanwhile, the 14 million Americans out of work and the 6 million who have been out of work for half a year or longer pay the price of a political system that cannot adequately or appropriately respond to economic crisis.
National Post
dfrum@frumforum.com
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