Smith Faculty Opinion Article

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

February 4, 2010

Stocks Stumble as Investors Lose Confidence in the Recovery

Stocks are tumbling, as investors realize President Obama is simply not offering policies that will fix the U.S. and global economies.

Each week more than 450,000 Americans apply for new unemployment benefits, and 17 percent of adults can't find a full time job or have quit looking for work altogether.

Since Massachusetts voters sent Democrats a vote of no confidence, President Obama has been doubling down on bigger government and class warfare as the road to prosperity.

Meanwhile, the two biggest problems that block economic recovery go unaddressed-most businesses lack enough customers and access to bank credit to create jobs.

Just about everyone recognizes consumer spending will not come roaring back. Those few businesses that can increase sales often can't borrow from banks to expand.

Not surprising, the 5.7 percent GDP growth recorded in the fourth quarter was mostly an accounting adjustment, reflecting a slower pace of inventory depletion.

Domestic consumption and investment contributed a tepid 1.8 percent to growth, and that pace is simply not enough to sustain a recovery.

The government is all tapped out. Deficits if pushed any higher could cause an international run on the dollar and a financial calamity even Ben Bernanke's printing press could not fix. Not surprising the government added zero to fourth quarter growth.

Salvation must come from bringing down the $440 billion trade deficit, and in particular the huge trade imbalance with China. Cutting that deficit in half would boost GDP by 3 percent, resurrect manufacturing and high wage jobs, and it's off to races-healthy growth rivaling the Clinton years.

The president's new export promotion program and small businesses incentives are too little too late.

The president needs to stop talking about Chinese mercantilism and do something about it. Instead, he whines America won't turn to protectionism

Currency manipulation makes China the most protectionist bully on the planet, robbing growth and jobs from the United States and Europe and increasing the risk that troubled governments like Greece may default.

Meanwhile, after taking $2 trillion in government aid, the banks are dolling out $150 billion in bonuses but are unwilling to loan most businesses the capital they need.

It is high time to separate the commercial banks that enjoy a government guarantee from investment banks like Goldman Sachs. Limit aid to commercial banks for the purposes of making loans, as opposed to trading currency, energy futures and other complex financial instruments.

The president expresses outrage about Chinese trade practices and bank bonuses but refuses to take substantive actions-for example, countering Chinese protectionism with a tax on dollar-yuan conversions to raise the effective price of the yuan, and imposing a 50 percent tax on bank bonuses as Britain has done.

The markets have figured it out. President Obama is a charismatic campaigner and eloquent speaker, but he simply does not have a grasp of the facts or lacks the courage to fix what is broken in the American economy.

Folly in Washington begets panic on Wall Street.

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