OPINION
DECEMBER 31, 2011
The Year of Governments Living Dangerously
The Fed's low-interest policy is doing little to help banks and doing a lot to put public pension funds in jeopardy.
By GEORGE MELLOAN
What words could best describe the most baleful influence on the global economy in the year 2011? How about "governmental dysfunction?"
The European banking crisis that has threatened global finance is about nothing more or less than the failure of the governments of Greece, Italy, Portugal, et al., to control their budgets, raising doubts about the value of their bonds. Rather than trim their bloated public sectors, they have preferred to beg for bailouts.
The U.S. government has run deficits exceeding a trillion dollars for the last three fiscal years, forcing it to borrow heavily from the Federal Reserve, China and Japan. Despite warning signals from credit-rating agencies, Washington is doing no better than the Europeans in bringing spending under control.
Private banks in the U.S., Asia and Japan have been enlisted to help finance massive public deficits.
As a Christmas present to beleaguered governments, the European Central Bank on Dec. 21 pumped $640 billion into European banks. French President Nicolas Sarkozy suggested pointedly that they use it to buy sovereign debt. So much for the ECB's one-time resolve to hold the line on sovereign-debt bailouts.
U.S. and Japanese banks, whose main business once was lending to the private sector, also are responding to various inducements to load up on government-issued paper. In simple terms, governments are increasingly plundering the private sector to raise cash. Meanwhile, the Federal Reserve's low-interest-rate monetary policy is doing little to help the banks and doing a lot to put public pension funds in jeopardy. Teachers, policemen, firemen and the like won't be able to count on the benefits defined in their contracts if the funds continue to have extreme difficulty in getting a decent return on investments.
The Republican House and its budget chairman, Paul Ryan, have at least put the budget problem on the agenda. But hopes for big achievements have been disappointed. Congress finally passed the fiscal-year 2011 budget last April—six months late—but with only a minuscule cut in discretionary spending. Unsurprisingly, Congress once again missed its Sept. 30 deadline for passing a new budget.
The fiscal-year 2012 appropriation bills offer no hope of reform. According to a Heritage Foundation analysis, the drafts now moving through Congress spend more than the House Budget Resolution last spring—a resolution that called for only a $30 billion reduction from FY 2011 discretionary spending of $1.0498 trillion. Obsolete or ineffectual departments like Agriculture, Commerce, Labor and Education will still receive their accustomed share of taxpayer billions.
Budgetary stasis is unhappily only part of the problem of dysfunctional government. Federal regulatory agencies, the Environmental Protection Agency in particular, have gone out of control. Washington is still laboring under the hallucination that it can change the climate of the planet (they assume it needs to be changed) by writing rules and regulations.
The latest EPA brainstorm will force the shutdown of enough coal-fired power plants to put the nation in danger of serious power shortages. Scare tactics, like posing a nonexistent threat of mercury poisoning, is part of the game.
And then there is Dodd-Frank, that massive law passed in 2010 to punish "Wall Street" for a 2008 financial meltdown that was mostly the fault of the bill's two authors, Sen. Chris Dodd and Rep. Barney Frank. They were the two main defenders in Congress of Fannie Mae and Freddie Mac, the two government-sponsored enterprises mainly responsible for poisoning the world securities market with toxic mortgage-backed securities.
Dodd-Frank left it to regulators to write the detailed rules for how banks and securities houses will henceforth run their businesses. And boy, do those guys know how to write rules. The proposed guideline for just one of the many strictures in Dodd-Frank runs 288 pages. It deals with the so-called "Volcker rule," which will prohibit banks from trading securities for their own account. Former FDIC chairwoman Sheila Bair, writing in Fortune, describes it as a "Rube Goldberg contraption of regulation," noting that the Glass-Steagall Act, which applied something similar to the Volcker rule from 1933 until it was repealed in 1999, ran to only 32 pages.
The Pelosi-Reid Congresses from 2007 through 2010 were responsible for such effusions. There's also ObamaCare, yet another massive bill that turns over the vital details to the federal bureaucracy. Businesses, doctors and hospital administrators can only await with fear what confusions and delusions the bureaucrats produce out of their efforts to mastermind the many millions of decisions that must be made daily in a vital and complex industry.
Judging from opinion polls showing increasing public contempt for what goes on in Washington, voters are frustrated by their seeming inability to get the attention of the beast. The ups and downs in the polls of the Republican presidential candidates reflect an anxiety over whether any of them are up to the job.
Of course, there is a president now, Barack Obama. But he resigned from active duty last summer, preferring to spend most of his time giving speeches in his campaign for re-election. Like the Republicans, he too is running against the government. That's a curious position to take, given that what he is running against is very much his creation.
Mr. Melloan, a former columnist and deputy editor of the Journal editorial page, is author of "The Great Money Binge: Spending Our Way to Socialism" (Simon & Schuster, 2009).
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