The Great Stimulus Debate of '09: "Crybabies need not apply"

By MIKE WHITNEY

Barack Obama has decided to push the economy back into recession, and no one can figure out why. Perhaps the impressionable Obama has come under the spell of the deficit hawks and crystal gazers who see Armageddon around every corner. Or maybe he's thrown-in with the snappish Marc Faber whose dire predictions of hyperinflation are about as cheery as Hieronymus Bosch's vision of Hell. Whatever the reason, the President has done a hasty volte-face and decided that trimming the deficits in the middle of a severe economic downturn is the way to go. Here's what Obama said just days ago on his Asia tour:

"I think it is important to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

Obama is either getting some very bad advice or he's simply determined to drive a stake into the flickering economy. All plans for deficit-pruning should be postponed until the economy steadies itself and the jobs picture improves. Raising taxes or slashing spending while the economy is still contracting is crazy. It shows that Obama is being influenced by the Gain through Pain school who think that mass liquidation and years of bitter retrenchment are the best medicine. They're wrong. Sensible people look for solutions that don't involve hair shirts, moving to underground bunkers or living off root-crops for the next millennia.

Obama's metamorphosis into Ludwig von Mises sends a disturbing message to working people as well as to foreign creditors. It suggests that the commander-in-chief is in the thrall of careworn Jeremiahs. If that's the case, things could get ugly fast. With the Democrats backing-down on a second round of stimulus, the Fed signaling an end to quantitative easing, and Obama moaning about rising deficits; there's a good chance that the ailing economy could take another dunk down the elevator chute.

Deficits are not the problem. Deflation is. Bank lending is shrinking, consumer spending is down, housing prices are falling, unemployment is soaring and the wholesale credit markets are in a shambles. Which one of these problems is deficit related? None. This isn't the time to slash government support in the name of "fiscal responsibility". Obama needs to ignore the alarmists and deficit-psychos.

Has Obama perused the jobless figures lately? Has he noticed the Fed shoving more than a $1 trillion under the collapsing housing market with no sign of improvement? Has anyone told our strapping sagamore that the entire financial system is resting on a crumbling foundation of garbage mortgages, toxic paper, and non-performing loans?

Cutting the deficits now--when we should be expanding them--will lead to a cycle of debt deflation that will push-down asset prices, increase defaults, force more layoffs, slow consumer spending, lower earnings and put the economy into a long-term funk. It's a suicidal policy that will end in catastrophe.

If Obama wants more proof that the economy is still tanking, he should read Fed chair Ben Bernanke's speech to the Economic Club of New York delivered earlier this week. The presentation is a sobering snapshot of lingering stagnation with precious few glimmers of light. Here's an excerpt:

“The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible....How the economy will evolve in 2010 and beyond is less certain....

“Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve's Senior Loan Officers Opinion Survey shows that banks continue to tighten the terms on which they extend credit for most kinds of loans...

“Household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

“The demand for credit also has fallen significantly....Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt. Also, write-downs of bad debt show up on bank balance sheets as reductions in credit outstanding. Nevertheless, it appears that, since the outbreak of the financial crisis, banks have tightened lending standards by more than would have been predicted by the decline in economic activity alone..... Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.

“The best thing we can say about the labor market right now is that it may be getting worse more slowly. “(Fed Chairman Ben Bernanke Speech Before Economic Club of New York)

Is this really Bernanke speaking, or is the Fed chief channeling Nouriel Roubini?

To summarize, credit is tight. Consumers aren't borrowing and the banks aren't lending. Unemployment is soaring and deflation is pushing down asset prices while the burden of personal debt is rising in real terms. It's a very bleak report. The only sign of improvement is that “things are getting worse more slowlyâ€