By Economic Forecasts & Opinions
Last Thursday, President Obama unveiled the toughest new restrictions yet on the nation's largest banks in the aftermath of the financial crisis. The proposal is called the “Volcker Rule”, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has been pushing the proposal for months.
Under the still sketchy Volcker Rule, referred to as “Glass-Steagall in spirit,” banks that take federally insured deposits or have the right to borrow from the Fed would be required to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms.
In other words, banks can choose to engage in proprietary trading (prop trading), or be a traditional bank, but can't do both.
The plan has plenty of skeptics and it's too early to know whether it will win congressional approval. But the specter of new profit-crimping regulation was enough to batter the bank stocks sending the Dow Jones Industrial Average down 213.27 points, or 2%, to 10389.88, the biggest decline since last fall.
Right Direction, But…
In recent years, banks have bulked up their profits in areas way beyond the traditional banking. The far more profitable and risky investing banking units have grown dramatically and were at the heart of the financial crisis.
While a renewed focus on financial reform by the Obama administration is certainly a welcoming sign and in the right direction, it certainly does not address the more dire issue of the Middle America – jobs.
Moreover, the timing and haste of the proposal has drawn criticism that this is simply a transparent attempt at populism, as it came two days after voters in Massachusetts sent a Republican to the Senate depriving Democrats of the 60 votes often needed to prevent a Republican filibuster in the Senate.
Missing the Point
The Massachusetts defeat of the Democrat essentially signed, sealed and delivered the one-year report card of the Obama Administration.
While the nation was suffering through the worst economy since the Depression, the Democrats wasted a year on mis-directed priorities such as overhauling health care, expanding college aid, and reducing climate change, etc., while forestalling a much needed legitimate mass job creation strategy.
Poverty Expanded to Suburbs
A new study from the Brookings Institution found that in 2008, 91.6 million people—more than 30% of the nation’s population—fell below 200% of the federal poverty level.
From 2000 to 2008, the poor population in the U.S. grew by 5.2 million, reaching nearly 40 million, up 15.4%, a pace almost twice as fast as the increase in the total population.
Suburbs in the nation’s largest metro areas saw their poor population grow by 25%. Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. (Table 1)
Falling Wages, Rising Inflation
The latest Consumer Price Index (CPI) rose at an annual rate of 2.7% with the core rate, in which food and energy are removed from the mix, rising 1.8%.
However, what hurt consumers the most was falling wages.
According to the Bureau of Labor Statistics, while average weekly earnings were up 1.9% year-over-year in December 2009, the real wage, adjusted for inflation, showed that buying power had dropped by 1.6%, the first year-over-year decrease since 2003.
Workers are also being squeezed from the lowest average number of hours worked in a week since 1964, while the underemployment rate (U6), a better gauge of the jobless picture, remains high at 17.3% as of last December, up almost 4% year-over-year.
Job Creation, Anyone?
Infrastructure and construction related spending typically plays a large role in economic recovery. While relatively modest government investments in stimulus construction are having some positive impact on the economy, the overall construction unemployment rate is still a staggering 22.7% as of December 2009, twice the national average and at the highest level in at least a decade.
Construction economists note that stimulus-related jobs gains in the industry have been more than offset by losses in non-residential construction and public works funded by state and local governments.
This just illustrates that more comprehensive and “add-on” job creation programs need to be strategized and implemented. That is, one job creation should lead to two or three more jobs, instead of special interest programs that create one new job while leading to two or three job losses in other areas.
Rhetoric & Substance
Nevertheless, from his recent speech, President Obama appears to be still on the path of mis-guided priority when he said that a jobs bill emerging in Congress must also include tax breaks for people trying to make their homes more energy efficient.
In addition, Senator Evan Bayh said in an interview on Bloomberg Jan. 23 that he expects
“Obama to use the Jan. 27 nationally televised address before Congress to embrace creation of a commission that would suggest spending cuts and tax increases that Congress would be forced to vote on.”
It seems obvious that the Administration will continue its seriously mis-aligned policies with the truth in observable reality. Soaring rhetoric notwithstanding, people grasp the difference between showmanship and substance.