The Committee to Destroy the World. Lewitt Michael E.

to the 2008 financial crisis.

      After the crisis, the government consistently sought advice, not from those who correctly predicted the housing bubble and resulting market collapse, but instead from those economists and strategists who missed the obvious warning signs and those investors who lost enormous sums of money. If your fund was down 80 percent, you were at the top of the list of the people the government called for advice. Of course, many of these people purchased their seats at the table with large campaign contributions; that is what happens in a system of crony capitalism. Nonetheless, it was a shame that we were calling on the same individuals who led us to the brink disaster to lead us out of it. We can see the results of that approach six years later: an over-leveraged and over-regulated financial system that is failing to fuel sufficient economic growth to pay our current and future obligations.

      In the midst of the crisis, presidential aide Rahm Emanuel (who was not the individual who called me) famously said that it would be a shame to let a crisis go to waste. But that is exactly what happened. Despite heroic efforts to prevent a complete collapse of the financial system after the failure of Lehman Brothers and the near demise of insurance giant AIG, policymakers failed to address many of the underlying regulatory, fiscal, and monetary policy failures that led to the financial crisis while also creating new ones.

      That is not to say that they did nothing: they took some important steps to reform the U.S. banking system and make it better capitalized. But they failed to address the two biggest elephants in the room: (1) the incessant growth of debt in the U.S. and around the world; and (2) the $650 trillion derivatives infrastructure that hangs over the entire edifice of global finance like a dark cloud waiting to burst. Excess debt and all that comes with it pose the greatest risk to global financial stability since the Great Depression and absolutely nothing has been done to tame this beast.

The Death of Fiscal Policy

      Mr. Obama inherited an extremely difficult situation upon taking office, but he made it worse through a series of deliberate policy choices that further weakened the American economy. His proclivity for government rather than market solutions imposed enormous regulatory burdens on the economy that impeded private sector growth while loading the government with trillions of dollars of future obligations that it can’t afford to pay.

      The first large piece of economic legislation that Mr. Obama promoted was the $800 billion American Recovery and Reinvestment Act. The president touted this so-called stimulus bill as a massive boost for the American economy when it was passed by a Democrat-controlled Congress in February 2009, but it proved to be a bust. Very little of the money was spent to increase the productive capacity of the American economy as proven by the economy’s sub-par growth in the years that followed. We may not have been building bridges to nowhere like Japan and China, but we weren’t building bridges to the future either.9

      Then Mr. Obama decided to impose a new multi-trillion-dollar entitlement on one-sixth of a struggling American economy – The Patient Protection and Affordable Care Act (familiarly known as ObamaCare). Unable to get the highly unpopular law passed in Congress by conventional means, he worked with Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi to force the bill through via the federal budget reconciliation process that only requires 51 votes rather than the normal three-fifths majority. This legislative device was inserted in the Congressional Budget and Impoundment Control Act of 1974 to end filibuster, close debate, and pass controversial budget bills. Of course, ObamaCare was much more than a mere budget bill, but this was only the first of many instances where the Obama administration trampled on the rule of law to pursue its ideologically driven policy goals. The Democratic leadership dressed up the healthcare bill as a phony civil rights measure, even parading former civil rights leader and House member Elijah Cummings up the steps of the Capital on the day of passage, to push the law through Congress over the opposition of the Republicans and much of the American public.

      In order to gain business support, the administration bought off the health insurance, hospital, and healthcare industries that stood to gain millions of new patients whose bills would be paid by the government. The merger boom in these industries in the years following passage of the law (with no meaningful antitrust review) coupled with escalating drug costs (with no complaint from the administration) spoke to the devil’s bargain that paved the way to so-called “healthcare reform.”

      While most people agree that all American citizens should have access to healthcare, the harried, procedurally irregular and politically dishonest way in which the law was passed imposed a deeply flawed and prohibitively expensive bill on American taxpayers. ObamaCare is another multi-trillion-dollar entitlement whose true costs were deliberately delayed until after Mr. Obama leaves office. By late 2015, the law was already struggling due to its high costs and flawed incentives. More than half of the regional coops set up under the law had failed, year-end 2016 enrollment was projected to come in at half the 20 million originally projected by the Congressional Budget Office, and the country’s largest healthcare insurer, United Healthcare, announced in November 2015 that it was considering withdrawing from ObamaCare exchanges due to massive losses. We are also learning that the true costs of the law’s expansion of Medicaid to the states is going to be in the tens of billions of dollars as federal subsidies roll off, placing enormous burdens on state budgets after Mr. Obama leaves office. The law asks nothing of its beneficiaries and provides no means to pay for itself. Its dubious economics are only rivaled by it questionable legality. The law survived two near-death challenges in the Supreme Court only because Chief Justice John Roberts flouted long-established standards of statutory interpretation to rewrite the statute, severely damaging his institution’s integrity and reputation in the process.10 In truth, Mr. Obama’s dream of universal healthcare is an economic and political nightmare.

Monetary Policy Follies

       The Failures of the Fed

      Since the financial crisis, the Federal Reserve and its foreign counterparts have engaged in policies that failed to stimulate sustainable economic growth and, once they saw them fail, refused to change course and instead intensified the same policies.11 While former Federal Reserve Chairman Ben Bernanke was rightfully praised for the steps he took during the financial crisis to prevent a total collapse of the financial system, his successor, Janet Yellen, kept emergency policies in place far too long after the crisis ended. The result was seven years of zero interest rates and trillions of dollars of quantitative easing that boosted financial markets but left the economy struggling to grow.

      These policies also created inflation in the prices of many of the products and services used by consumers despite these higher prices not being reflected in official government inflation statistics. They also contributed to a dramatic increase in wealth inequality in the United States, which exacerbated social instability and political divisiveness during an administration that purported to be benefitting those most damaged by the policies designed to help them.

      Monetary policy led to massive inflation in the prices of financial assets such as stocks and bonds as well as art and other collectibles, high-end real estate, and anything else denominated in increasingly debauched paper money. These assets experienced what the economist Irving Fisher termed a “money illusion” in which the inherent value of the assets themselves was not increasing; instead, the value of the fiat currencies used to purchase them was deteriorating.12

At the same time that consumers were being told by the government that the prices of the everyday goods they need in order to live were barely increasing, these prices were actually rising sharply. In a word, the government was lying to them. Figure I.3 shows the rise in inflation as measured by the government.

Figure I.3 Rise in Inflation as Measured by the Government

      SOURCE: CLSA, U.S. Bureau of Economic Analysis.

These numbers are, of course, utter

9

Some economists like Paul Krugman have argued that the stimulus plan was not large enough. The size of the stimulus plan was less important than the substance. A larger bill that failed to direct money into productive investments would have been no more successful than the plan that was adopted.

10

In the first opinion, National Federation of Independent Business v. Sibelius (2012), Justice Roberts ruled that the word “penalty” really meant “tax” to rescue the law, in the process ignoring the long history of jurisprudence that establishes different definitions of the two words. In the second opinion, King v. Burwell (2015), Justice Roberts ruled that the term “Exchange established by the State” really meant “Exchange established by the State or the Federal Government” despite the fact that the words “or the Federal Government” were nowhere written in the law and the legislative history clearly showed that Congress intended the law to require states rather than the federal government to set up the exchanges in question. The language was not a drafting error as intellectually dishonest proponents of the law tried to argue in the press and to the Court. These two opinions usurped the legislative function and constituted nothing other than judicial lawmaking and a clear violation of the separation of powers under the Constitution.

11

While there has been endless debate about the efficacy of quantitative easing, even the Federal Reserve’s own economists concluded that it has failed in its stated goals. See, for example, Stephen D. Williamson, “Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay,” Federal Reserve Bank of St. Louis, Working Paper Series, July 2015, http://research.stlouisfed.org/wp/2015/2015-015.pdf. Mr. Williamson is a Vice President at the Federal Reserve Bank of St. Louis and concludes in this paper that, “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, despite massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2 percent inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.” Of course, it is difficult to determine who is more confused, the Federal Reserve or Mr. Williamson since inflation in the real world is much higher than official inflation statistics suggest and inflation in financial asset prices has skyrocketed as a result of QE. The bottom line is that as long as we leave our fate in the hands of economists, our gooses are cooked. The real problem is that central bankers don’t trust markets; the world would be much better off if they stopped interfering in them and allowed markets to operate freely.

12

Irving Fisher, The Money Illusion, (New York: Adelphi Company, 1929).