HANS BRINKER TO OBAMA: THE MONEY WON'T WORK - March 9, 2009

The legend of the brave Dutch boy – thought by many Americans to be named Hans Brinker - who supposedly put his finger in the dike to prevent a flood, was actually a literary invention by the American writer Mary Elizabeth Mapes Dodge.  Hans never stood in the rain, never shivered in the dark, and never foisted his chubby finger into a dike – it just made for a nice story with a happy outcome. Now President Obama is painting himself as the brave little Dutch boy who is preventing an onslaught of financial disasters from decimating America – but the truth is that his finger won’t be enough to stop the flood.

President Obama’s stimulus is the wrong prescription for America.  Looking to the past for insight, his strategy to jump-start the American economy with an influx of government spending is a remedy that has proven itself amiss.  Both President Obama and Treasury Secretary Timothy Geithner are on record as saying that the Japanese experiment in quantitative easing didn’t work and admit the same about FDR’s New Deal. Unfortunately, they attribute these failures to the governments’ inability to act quickly, and their mutual aversion to spend the amount of money necessary to truly correct the problem.

In both historical instances, massive doses of government stimulus had no lasting effect. Look at the facts:

• When FDR came into power in 1933, unemployment in the U.S. had reached a high of about 25%. Despite tripling federal spending on the much heralded New Deal, the best unemployment number achieved was 14%, in 1937. By 1939, however, unemployment was back up to 19%.
• In the Japanese crash, the Nikkei fell from around 38,000 at the height of the bubble in the late 1980s, down to around 7,000. During a five-year period of quantitative easing, the Nikkei rebounded by about 100%. Unfortunately, however, the second the Japanese government stopped spending, the stock market fell to around 7,500, near where it remains today (Seeking Alpha, Why Does Obama Think Stimulus Can Shock Economy Back to Life? February 22, 2009, David Galland).

The reality is that the government can't just create purchasing power. Every new dollar Obama spends has to be borrowed – or subtracted from money available to the private sector. Translation: when government spends more on infrastructure or education or healthcare it means less money for private investment. More hand-outs by government to hurting families means less private lending for family purchases. When private sector spending goes down the economy continues to worsen.

Even the nonpartisan Congressional Budget Office (CBO) has said that the President’s economic recovery package will actually hurt the economy more in the long run than if he were to do nothing. According to CBO, Obama’s plan may help “in the short term but will result in so much government debt that within a few years [it] would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.” (Washington Times, “CBO: Obama stimulus harmful over long haul,” February 4, 2009) After examining the facts, CBO concluded that over time, each dollar of additional debt will reduce private domestic capital by a third.

Looking to the President’s broader economic recovery plan, he has initiated a $75 billion dollar housing bailout for Americans facing pending foreclosures. President Obama has emphasized that his plan will help only those homeowners who have acted responsibly. “It will not rescue the unscrupulous or irresponsible,” Mr. Obama said. “And it will not reward folks who bought homes they knew from the beginning they would never be able to afford” (The New York Times, “President Obama’s Remarks on the Homeowner Affordability and Stability Plan,” February 18, 2009).

Unfortunately, the President’s plan will help those who got in over their heads because it will be nearly impossible to distinguish homeowners who are truly in financial distress from those who simply bought more house than they could ever afford. David Leonhardt at the New York Times' Economix and Alyssa Katz at The Big Money concur with this point. Alyssa Katz points out that "millions of speculators lied on their mortgage paperwork in order to get the cheaper and looser mortgages available to homeowners, and it's doubtful most will want to hang on to their property even if the feds are willing to help them,” (TheBigMoney.com, The Loan Ranger: Why Obama’s Plan to Ease Troubled Mortgages will be Harder than it Sounds,” February 17, 2009).

Research at Credit Suisse suggests that borrowers without equity are not a good bet to stay current. This signals that more Americans facing foreclosure will have secondary defaults and that the President’s housing plan will only delay the inevitable. Housing prices according to the National Association of Realtors are at their lowest point in decades – and buyers are interested, but product is outstripping demand. Why? In a market plagued with inevitable losses each month it’s smarter to wait for a lower price. Consumer psychology is what is truly depressing the housing market. President Obama’s housing plan should address this reality and offer buyer tax credits that expire if not used within a given year, rather than throw taxpayer dollars at homeowners that have a high probability of re-defaulting on their government subsidized mortgages.

While the determination and optimism of the President is praiseworthy, what have been the tangible market effects to Obamanomics? As the Senate passed the $838 billion economic stimulus bill, New York financial stocks fell by more than 5.75% and the Dow Jones Industrial Average dropped 4.62% to close at 7,888.88 points. Many economists have deemed the plan convoluted, obfuscating and clouded.  “What the market was looking for was clarity, simplicity and resolution "according to analyst James Ellman of Seacliff Capital (BBC, 02/11/2009).  The day after announcing his mortgage plan, UBS put it this way: ‘Obama Speaks, Market Listens, Sells Off.’

The general calamity of President Obama’s stimulus package and homeowner rescue plan is an economic reality. Government bailouts and stimulus packages are financed through current resources – resources that could have gone to private investments. When private sector spending goes down, the market suffers. The President has his finger in the dike, but it will have no effect on total current resources in the system or on total employment. That only happens when government spending is more productive than private spending – an overwhelming challenge, to put it lightly.

Stephanie Kimball

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Author of the article holds B.A. degree in Political Science from the University of California Davis. For the last 9 years she has been working as a Legislative Director for several Republican Assembly members in the State of California.
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