There are many factors associated with Barack Obama's plunging popularity. Botched health care reform certainly hasn't helped. Neither has a near-double-digit national jobless rate, nor a $1.6-trillion budget deficit. But what outrages American voters most is the billions of dollars given to Wall Street investment bankers, who continue to live la dolce vita and flaunt their arrogance in taxpayers' faces.
As I've argued before in this blog and in chapter 7 of my book, it wasn't too-big-to-fail financial institutions but the interest rate shock from soaring oil prices that deep-sixed the economies of both the US and the rest of the oil-guzzling world. Interest rates didn't just rise from around one per cent to almost six per cent because no one was minding the store at the Federal Reserve Board. It was soaring oil prices that did all that heavy lifting.
Not only is rescuing failed investment banks a total misread of what put the economy into this recession in the first place, but the huge deficits needed to fund those huge corporate welfare checks all but preclude any further economic stimulus in the future.
In fact, they'll do just the opposite. Reining in the deficits that follow from Wall Street's bailout will lead to years of fiscal restraint and a burden on future economic growth. Job-creation rhetoric aside, the President is already stepping on the brakes, and Congress will surely want him to press much harder on them over the balance of his term, as Washington struggles to get the nation's exploding debt under control.
As their taxes inevitably rise and their social security entitlements inexorably shrink, American taxpayers will increasingly wonder what they have gotten for their tax dollars. And they will no doubt ask themselves why it is that, if they have to own Merrill Lynch and Bank of America now, at the bottom of the cycle, they don't also get to own these same institutions at the top of the cycle.
Henry Paulson, the recent Treasury Secretary, along with all the other ex-Goldman Sachs folks still at the Treasury Department, will quickly chime in that private ownership is essential to encouraging risk-taking.
But what really encourages risk-taking on Wall Street is when the losses from bad bets can be socialized and left to taxpayers, while the gains from good bets can be paid out to partners at bonus time. And it's precisely this type of risk-taking that will soon bring back the regulatory barriers than once separated brokerage houses and investment banks from deposit-taking institutions.
Wall Street has always eschewed regulation, pointing to the willingness of the rest of the world to fund it. But the only flow of funds coming in these days is from the American taxpayer, and that, in a nutshell, has been the reason for President Obama's quick fall from grace.