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Better for the Obama administration to do nothing than to continue spending recklessly and destructively.

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Don’t Just ‘Follow the Money’

Better for the Obama administration to do nothing than to continue spending recklessly and destructively.

Vice President Biden was quick to claim that the Obama administration was responsible for the sudden rise in the Dow Jones Industrial Average — about 400 points — last week. But since Obama’s inauguration, the Dow has toppled every time he gave a speech on the economy. A more likely reason is that neither Obama nor Treasury Secretary Geithner said much last week.

Three other events show that while the American economy is giving signs of recovery, the dangers are still enormous and that any recovery may be in spite of the government’s actions, not because of it.

Obama’s so-called “stimulus package” — costing about $1.2 trillion — is aimed at reducing healthcare costs, converting our carbon-based economy to “green” power and expanding government involvement in education. None of those three factors is among the reasons for the accelerating recession and increasing unemployment.

First, one of the most important economic indicators — the bank-to-bank lending rate called “LIBOR” (the London Inter-bank Offered Rate) — is going back up. This week, the 1-month, 3-month and 6-month LIBOR rates were 0.56%, 1.33% and 1.96% respectively. That’s up from a month ago, when they were 0.45%, 1.22% and 1.69%. (A year ago, when the financial market was beginning to choke on bad debts, they were 2.89%, 2.87% and 2.74%.)

The reversal in the LIBOR’s slide shows that neither the “stimulus” nor the bank bailout plan (the so-called “toxic asset relief program” or “TARP”) are working to restore confidence in the financial system. Nothing has taken the apparently valueless mortgage-backed securities off the books of the banks, so the financial industry — having recovered despite the government’s inaction — is worrying itself back into gridlock.

On “Meet the Press,” Obama’s Chair of the Council of Economic Advisers Christina Romer said the Obama administration was already generating confidence in the financial recovery. Given Obama’s and Geithner’s performance to date, that is simply fatuous.

Second, government spending –in the “stimulus” plan and planned in the Obama $3.6 trillion budget — has raised the anxiety of America’s chief lender, China. Chinese Premier Wen Jiabao told the Financial Times that, “We have lent a huge amount of money to the United States. Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the US to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Wen’s comments came during a week when House Speaker Nancy Pelosi and Budget Committee Chairman David Obey (D-Mi) first said (and then backed away from) that they anticipated a second “stimulus” package to pour out another $500-$700 billion. More government “stimulus” spending — not aimed at the causes of the recession — will only raise China’s anxiety. And for good reason: the more money borrowed by the government and poured out to conduct Obama’s economic revolution devalues the debt held by China.

To China, America is the debtor that is too big to fail. Politically, China wants to leverage our economic weakness against us, but our recovery is as important to them as it is to us. There is a parallel between the relationship we have with China and the one we have with the third indicator, the American Insurance Group.

AIG has received about $180 billion in bailout funds. As the Wall Street Journal reported, $1.2 billion of that money will be paid to AIG employees in “retention payments” and bonuses. Moreover, about two dozen other financial institutions — including Germany’s Deutsche Bank AG, France’s Société Générale SA, the Royal Bank of Scotland and British HSBC Holdings PLC – were given about $50 billion of the AIG bailout funds by AIG.

Populist anger at the bonuses is well-founded, but the accompanying rage at the other foreign interests getting almost one-third of the money supposed to bail out AIG is not. The financial market is truly international and bailout money will flow inevitably to unexpected recipients. But what were the payments made for?

Too many politicians and pundits are condemning the AIG money channeling for all the wrong reasons. The right thing to do is not just to “follow the money,” but rather to follow what the money is being used for and prevent it from being used in any way other than directly to solve the credit market gridlock.

Last fall, I wrote that the problem with the bailouts was that they were done too quickly, gambling but not ensuring that the money spent would actually free up the credit markets. The TARP legislation had virtually no limitations, audit trails or other normal financial controls to ensure that the funds would be used to free up the credit markets and thus help the housing and other business credit markets return to something resembling normalcy. The AIG bonuses — rewarding many of the people who caused AIG’s failures — could have been banned. But they weren’t.

The foundational failure of the bank bailout is in the fact that Congress rushed to do something — regardless of whether it would work to solve the specific problem.

Which is the same failure on which the “stimulus” legislation was founded. It spends money recklessly and destructively without ensuring that the funds are spent on programs that might actually relieve the economic crisis.

This week or next, the Obama administration is expected to release the financial market crisis plan it promised in February with great fanfare. Then, the president promised that serial tax evader and Treasury Secretary Tim Geithner would be clear and specific in his speech outlining the plan. But Geithner was neither and the Dow Jones began falling before Geithner even finished his speech.

The bank crisis is today what it was last fall: a gridlock of credit that cannot be broken unless banks are somehow able to value and market the mortgage-backed securities which at one time were supposed to represent trillions of dollars in mortgages. The increase in LIBOR indicates that the financial markets aren’t buying what Obama and Geithner are selling.

The enormous risk is that the Obama administration will do too much too quickly — or simply get it wrong. Bush Treasury Secretary Hank Paulson stampeded the TARP legislation through Congress promising that the “toxic” mortgage-backed securities would be bought up by the government, freeing the banks to lend again. But Paulson backed away from the purchase just as quickly as Congress enabled him to do it. It was too hard for the supposed economic genius to figure out how to do.

One way to do that is to allow the banks most burdened by the toxic assets to fail, but President Obama has said that he would not allow that. The only other apparent solution is to establish a government “bad bank” — like the old Reconstruction Finance Corporation — to buy and hold the toxic paper in the hope it will someday achieve a marketable value. That could require another $2 trillion or more in government spending.

America is now where it was last fall: burdened by a banking crisis that no one really knows how to solve. Is Geithner that much smarter than Paulson? Or are Obama and Geithner willing to gamble another $2 trillion on another longshot bet they are still devising?

Given the recent rise in the Dow and the LIBOR — and the Obama administration’s penchant for spending recklessly and destructively — it would be better for them to do nothing than for them to continue pouring money into programs that can’t resolve the crisis.

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Written By

Mr. Babbin is the former editor of Human Events and HumanEvents.com (Jan 2007-Mar 2010) and served as a deputy undersecretary of defense in President George H.W. Bush's administration. He is the author of "In the Words of our Enemies"(Regnery,2007) and (with Edward Timperlake) of "Showdown: Why China Wants War with the United States" (Regnery, 2006) and "Inside the Asylum: Why the UN and Old Europe are Worse than You Think" (Regnery, 2004).

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