Zhao Yan: Obama and Bush Sr. in the Same Boat

The economy is cyclical, but voters are impatient.

As the economic recovery after the subprime crisis has been slow, Obama is saddled with “charges.” In the face of America’s complementary and closely connected monetary and fiscal policies structure and an independent Federal Reserve, Obamahas no choice as president but to produce a promising scorecard for the mid-term elections.

As of the publication time, election and opinion polls show that the Democratic Party has lost all hope. Obama is about to face a Republican-led House and Senate.

All politicians look forward to applause and cheers and desire rapid political achievements just like doctors look forward to patients quickly recovering. U.S. monetary policy administration is completely independent and perhaps this is to curb professional politicians’ “impulse towards quick achievements.”

If Bernanke’s control over monetary policies would loosen a little, I believe that there would be greater recovery and growth, and the first black president would have better days. Even though the sub-prime crisis has caused global deleveraging, and demand has become the crux of economic growth, stimulating demand is not necessarily the only “treatment” — we can also increase liquidity.

Whether the sub-prime crisis or the cyclic economic problems of the past, the flu analogy is apt. Other than immunization, then re-balancing and steady improvement, treatment can also take the form of going straight for a jab of the strongest antibiotics. Two kinds of treatments, with which the sick similarly recover, are discharged and go home. After the illness, is the immune system stronger or has drug resistance increased? You can consider that the next time you get hospitalized, but it remains your problem.

This is reminiscent of the brief economic slump 20 years ago between summer 1990 and 1991. Then-president Bush very much would have loved to see Greenspan relax U.S. monetary policy and yet had no authority to order Greenspan to do so. Bush ultimately lost re-election and has taken to heart Greenspan’s tightening of monetary control.

A famous slogan from the 1992 presidential elections, “It’s the economy, stupid,” has now resurfaced to be used against Obama during the mid-term elections, satirizing Obama’s lack of economic governance. But Bush and Obama are in the same boat, and I am afraid that is precisely the subtle profoundness of U.S. monetary policy.

Established in 1913, the mission of the Federal Reserve has always remained to control the technicalities of U.S. monetary policy. This means that the massive locomotive that is the U.S. economy is to be driven by two cooperative drivers — the president and the Federal Reserve chair.

The central bank is controlled by technocrats, and is characteristically more inclined towards technical maintenance of stability and is more likely to consider the economy from a technical standpoint. It has no responsibility, in success or in failure, toward the president.

I have discussed many times before that after the sub-prime crisis, while both China and the U.S. similarly adopted a policy called quantitative easing, the biggest difference is that China’s “easing” is the easing of bank credit, but in the U.S. it is the Federal Reserve’s “easing” towards banks, and at the same time tightening banks’ interactions with the markets. This has led to a substantial increase in capital adequacy ratio, federal funding for banks to pay interests on excess reserves and restriction on the proliferation of bank credit. To be accurate, the Federal Reserve claims that it cannot allow the banks to lend; in actuality, the policy has inhibited the indiscriminate lending prior to complete economic management such that the U.S. continues to face a liquidity squeeze.

In this environment of low interest rates but low liquidity, the U.S. has successfully restored the banks’ scorecards, in the midst of restoring real estate and employment. While the speed of recovery does not match up to the public’s levels of anxiety, it appears to be slow and steady. Till now, the U.S. enjoys low interest rates and yet does not have to pay the price of inflation. It is inevitable that SMEs will become victims under such monetary policy.

With fiscal policy under his control, Obama directly points to the current monetary policy as the weakest link. While the 16 consecutive tax reliefs for SMEs have yet to receive applause, if it is sustained in the long run, it will work out sooner or later. Currently, it is easily observed that 60 percent of revenues from large corporations that do not lack funding come from overseas markets. Such a high degree of internationalization and low-cost bonds stemming from low interest have become the stars of economic recovery and the highlights of the U.S. economy. U.S. companies, which dominate two-thirds of global mergers and acquisitions, set a new record total in mergers and acquisitions in the traditionally low-activity month of August; the stock market rose 10 percent in September, traditionally a slump period for the market, the best September performance in 71 years. And in the earning season just passed, U.S. corporations have reported better than predicted growth for the seventh consecutive quarter, a good condition not seen since 1993.

And more importantly, banks have started the expansion of credit. The Federal Reserve’s latest meeting log indicates that bank lending has started to show an upward trend since July — the report states that the credit crunch appears to have peaked and the situation is starting to improve.

In addition, in the months of September and October, Obama pushed for three measures, including $500 billion in renewing transport infrastructure and expansion, a $100 billion R&D tax concession scheme, and a proposal for $200 billion corporate tax cuts. According to Darrell Issa, Vice-Chair of the Committee on Oversight and Government Reform, $512 billion of the $787 billion set aside for the first stimulus package has been spent. Unfortunately, only $18.5 billion were infrastructure dollars; most of the remaining were used to support financially troubled public services in various states.

(The writer graduated from Peking University — International Relations and the China Center for Economic Research — and has worked for an overseas news agency as the head Chinese correspondent stationed in Beijing in the division of Macroeconomic and Financial Policies Analysis.)