Did the Administration Drive Another Nail Into Its Reelection Coffin This Past Week?
By Clark S. Judge: managing Director, White House Writers Group; chairman, Pacific Research Institute
Overseas and unbeknown to it, the Obama Administration may have sealed its 2012 fate in the past five days.
I am not talking about its feckless response to the expected report from the UN nuclear monitor – the International Atomic Energy Agency — that Iran can now produce nuclear weapons. Nor do I mean the widely spread assumption that in the absence of effective American policy in the region, Israel may feel compelled to take military action, similar to what it did to stop the programs in Syria and Saddam Hussein’s Iraq in years past. Nor am I talking about its befuddlement about Russia’s 1917-like warnings against such Israeli actions, what the London Telegraph called this morning the “drumbeat of war” (http://tinyurl.com/6ukshcf).
Nor do I mean the broad shared view that the administration’s early outreach to Tehran, silence about Iranian democracy protestors, hitting of a disconnected “reset button” with Russia, and planned precipitous withdrawal from Iraq are coming together in a pattern of catastrophic blundering, the most inept US foreign policy since Jimmy Carter.
All of these developments were bad enough for an administration facing an election in twelve months even as it struggles with tanking poll numbers. But no, the administration was a bystander this week in the Middle East. The potentially fatal deed was not a sin of omission, but of knowing, determined and all but unnoticed action.
At the G20 meeting on the French Riviera last week, the president agreed to begin implementing a set of international banking rules that could well send the United States in a renewed downward spiral between May and August 2012.
The rules are called Basel III. They require that banks increase their ratio of capital to loans. In effect this means that banks must do less lending.
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We have all heard the complaints, many of them coming from the White House, about all the money that financial institutions and corporations are holding onto and not investing. You can argue about the reasons. Government induced uncertainty is the biggest, in my view. But Basel III is something totally different, government induced certainty, the certainty that financial institutions will be required to have a certain volume of reserves at a certain date. And while the rules include a gradual phasing in of the mandates, the history here is that, to please regulators, banks get their houses in order quickly.
How big will the impact be? Before the crisis, some institutions that now come under the rules, but didn’t then, had capital rations of 2.5:100. For the largest institutions, the new rules require 7:100, in other words a dramatic reduction in loans outstanding.
What is more, the rules for what is capital and how loans are counted have apparently been tweaked to make life easier for European banks and harder for Americans. The CEO of JPMorgan Chase, an institution that came out of the financial crisis with few scars, got into a public spitting match with the head of the Bank of Canada about a couple of months ago. The Canadian has been a prominent player in the Basel process. Noting that big banks are treated less favorably than others, a distinction that effectively discriminates against the U.S. banking sector, the JPMorgan Chase CEO termed Basel “anti-American” and called for the U.S. to pull out of the regime.
Milton Friedman had a rule. Any move in monetary easing or tightening will take six to nine months to be felt in the real economy.
Let’s see. It is November 2011. If U.S. banks respond quickly to the new Basel rules, we should be feeling the impact between May and September next year. With the economy as fragile as it is, sophisticated borrowers (meaning all those nasty corporations that the Occupy Wall Street crowd, who the president so warmly embraces, wants to push under) may get even more cautious with their investment funds immediately, hording cash in anticipation of leaner times, hiring even fewer people than they are now.
I know that the argument for Basel and other capital mandates is to make banks safer and “systemically” significant banks safest of all. But are broadly framed rules really the best way to achieve safety? Is a JPMorgan Chase, which did not have significant issues during the crisis, really equivalent to a Lehman whose failure triggered the crisis? Is government event suited to make the distinction?
In any event, just in time to have an impact on the 2012 presidential contest, the White House may have driven another nail into the economy’s coffin. And to think: they didn’t know what they were doing.