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Valentine: Fed, IMF have taken the wrong actions

Friday, September 2, 2011

Fed Chairman Ben Bernanke now admits that the economic recovery is even weaker than he thought. New International Monetary Fund Managing Director Christine Lagarde says "we must act now" to save the global economy. "We" don't need to do anything. In fact, it's prior actions taken or encouraged by the IMF and the Fed that have led to this sluggish recovery.

I don't know how it could be any clearer. Keynesian solutions to fixing the economy only make things worse.

Steve Moore of the Wall Street Journal had a great side-by-side comparison of Obamanomics and Reaganomics. He compared both presidents who inherited collapsing economies and took a look at the state of each economy 30 months into their terms.

Obama, of course, took the Keynesian route of government intervention, pumping over a trillion dollars into the economy from the government for a so-called stimulus plan. The result? Unemployment has increased and the deficit and debt have skyrocketed.

Arguably, Ronald Reagan inherited a much bigger mess. No matter where you turned everything was double digits. Double-digit inflation, double-digit interest rates. Unemployment was rising quickly and would peak at 10.8 percent during the 1982 recession. Instead of spending taxpayers' money, Reagan cut taxes and spurred growth in the economy. Inflation dropped from 13 percent to 4. By this time in Reagan's presidency unemployment had dropped to 9.5 percent, on its way to bottoming out at 5.3 percent before Reagan left office. A 30-year mortgage when Reagan took office was at 14.9 percent. It had dropped to 10.7 percent by the time his two terms ended.

By every measure Reagan's policies were a success. By every measure Obama's are a failure.

When Bernanke says that the recovery is weaker than he thought that's only because he thought throwing more government money at the problem would help. Those of us who actually paid attention during the Reagan years knew neither the stimulus nor TARP nor more quantitative easing would do anything but make matters worse.

And now we have the head of the IMF calling for "mandatory substantial recapitalization" for Europe, which means more bailouts, more taxpayer money thrown down a rat hole and more fuel for the global economic fire that will soon be roaring out of control unless something is done about these so-called experts charged with putting it out.

Part of the Fed's strategy has been to keep interest rates artificially low. That's great for people borrowing, lousy for those who save. And with interest rates so low there's hardly any room for lenders to make money. The real danger with keeping interest rates low is you encourage more personal debt. It's very tempting to bite off more house than you can chew with interest rates around 4 percent. That's what got us into the housing mess to start with and now Mr. Obama is set to release a new round of "fixes" which will include low-interest home loans for people with bad credit.

I go back to Ms. Lagarde's comment from the IMF. "We must act now." No, Ms. Lagarde, you must get out of the way. We must do as Reagan did and cut taxes immediately to stimulate the economy. Funny how no one -- not even many Republicans -- is talking about cutting taxes these days.

Liberal economists will tell you we've entered a new era where recoveries will be much slower. The only reason recoveries will be much slower is because these liberal economists are now in charge. It's time to bury Keynesian economics for good and acknowledge that there's only one way to fix an economy. Cut taxes.

Phil Valentine is a radio talk-show host. His Web site is philvalentine.com.