Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

December 1, 2009 

Obama Confronting the Consequences of Bureaucracy and Corruption

For Democrats, the chickens are coming home to roost. Badly conceived efforts to rescue homeowners facing foreclosure, regional banks and the unemployed are failing.

Bureaucracy and corruption are to blame.

The president's program to restructure mortgages for homeowners facing payments too large for their incomes or who owe more money than houses are worth has only helped several thousand, not millions as expected.

The Treasury now proposes to shame some banks and invasively monitor, nag and cajole mortgage servicing companies-much like autocratic Beijing abuses Chinese financial institutions.

With mortgage rates at a 30-year low, homeowners with enough equity in their homes and solid incomes can restructure loans, more easily, privately. As for those under water, the president's program pays service companies too little-one to two thousand dollars per loan-to negotiate write downs.

Loan modifications generally require breaking covenants with bond-holders, not reworking loan balances with banks, because many mortgages were bundled into bonds and sold to insurance companies and other fixed income investors. Lacking sovereign immunity, service companies can't simply break contracts without consent. The whole process is too complex to succeed without strong arm government confiscation of private property.

Had President Obama used TARP funds to create a bad bank, akin to the Resolution Trust that worked so well during the Savings and Loan Crisis, those bonds would now be in the hands a federal agency, where loans could be worked out. However, the big Wall Street banks preferred easy credit from the Federal Reserve to borrow at near zero interest rates to work off their losses, and let the fixed income investors and regional banks be damned.

Now 124 regional banks have failed, the FDIC which insures their deposits is insolvent, and it can't find buyers for many other banks it would like to shutter quickly. Meanwhile, the Wall Street bankers-who contributed generously to the President's campaign coffers, Chuck Schumer's campaign fund for Democratic Senators and presidential economic advisor Larry Summer's multi-million dollar dowry in 2008-are "earning" record bonuses totaling $140 billion or one percent of GDP.

Meanwhile, the president slipped the United Autoworkers billions in severance benefits and equity from TARP money through quick rinse bankruptcies of General Motors and Chrysler.

Gotta admit, Obama takes care of his benefactors.

Meanwhile, Obama's stimulus package, the mythical calculations of White House economists notwithstanding, has not created the millions of private sector jobs promised.

Simply, the $789 billion has mostly been spent on temporary tax credits that failed to generate much additional spending, shortened furloughs for state and local government workers, and financial rewards for other campaign constituents.

My Democrat-leaning colleagues at universities from Maryland to Minnesota are ecstatic about receiving summer research money that won't create new jobs.

Had $400 billion been properly spent on infrastructure projects, two million construction- related jobs would have been created. The stimulus program is slated to spend a paltry $100 billion, and those monies are being badly managed and will generate few jobs.

Now President Obama is convening a jobs summit. Attendees will include business leaders who have contributed to his campaign and labor-leaning economists.

No doubt, those constituents will advocate more tax cuts-specifically focused to their businesses--and industrial policies that boost unionized employment. Those will create some temporary jobs but at very high cost.

Increasingly, fiscal policy in Washington looks more and more like the finances a Latin American republic in the1970s that failed in the sovereign debt crisis of the 1980s.

Washington, even with its power to print dollars, cannot escape one iron law of economics: Corrupt governments ultimately fail.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.