In a guest blog post for our “Get Money Out” series, Dr. Peter Morici writes about the influence financial firms have had in shaping federal policy regarding trade, banking, and campaign financing. He details how the financial interests of America’s biggest banks and corporations impose significant barriers to addressing the structural issues that hold America back from meaningful economic recovery and growth. “The business of America may be business, but as long as big money drives campaigns, American business will continue shrinking,” says Dr. Morici.
CAMPAIGN DOLLARS, CHINA AND THE BANKS
by Dr. Peter Morici
The U.S. economy cannot recover because structural problems that caused the Great Recession–trade with China, dependence on foreign oil and dysfunctional banks—have not been fixed. Especially regarding trade and the banks, campaign financing and the financial interests of America’s biggest corporations impose significant barriers to addressing those issues.
The seeds of the Great Recession were sowed by an imbalance of demand between the United States and Western Europe, on the one hand, and China and other Asian economies, on the other. The latter maintain rigged and undervalued currencies—essentially, those restrict conversion of their currencies into dollars and regularly purchase U.S. dollars to keep their currencies and exports cheap in western markets. They also impose all manner of high tariffs and restrictions on western exports into their markets. Overall this provides those economies with trade surpluses, strong demand and rapid growth, and imposes on the U.S. economy trade deficits, weak demand and slow growth.
During the Bush years, the U.S. trade deficit more than doubled to 5 percent of GDP—thanks to growing imports from China and expensive imported oil. When dollars earned producing goods in the United States go abroad to purchase imports but do not return to purchase exports, either goods pile up and layoffs result, or Americans must consume more than they produce.
During the final years of the Bush expansion, Americans consumed on a grand scale. Led by China, Asian and Middle East exporters purchased U.S. securities with dollars from their trade surpluses, and New York bankers happily recycled those into creative mortgages that pushed U.S. real estate to unsustainable values. The bankers profited grandly, selling to foreign and U.S. investors mortgage backed securities they knew would fail.
Those so called structured securities provided firms like Citigroup, Lehman Brothers and AIG a grand business—not so much in making loans, which was more the work of smaller regional banks—but in bundling bonds into securities, selling those to investors and writing SWAPS that insured those securities against default.
For a time, the proceeds from churning property, creative mortgages, and second mortgages permitted Americans to borrow more than they could afford to repay, use their homes as ATMs, and consume much more than they produced. In a nutshell that permitted a $700 billion annual trade imbalance and full employment—the economic equivalent of a perpetual motion machine—the last four years of the Bush expansion.
When homeowners could no longer refinance loans they could not service, the house of cards collapsed and the Great Recession resulted.
Over the last two years, consumers and businesses have been spending again, but a growing trade deficit has pulled down domestic demand and kept the economy from growing. Moreover, the large New York banks are reluctant to finance mortgage lending and loans to small businesses by regional banks. Instead, they have moved on to other trading and deal making they find more lucrative.
Oil and trade with China account for nearly the entire trade deficit, and until oil and trade policy are recalibrated and the banks made to serve the public purpose and shareholders, as opposed to the interests of traders and senior management, the U.S. economy can’t recover. Money in politics has a lot to do with Washington’s failure to fix trade policy and the banks.
To run for congress or president, candidates must amass millions in contributions from large individual donors—sums in the range of $5,000 per donor for each campaign. The only large industries with enough senior executives with this kind of money to make a difference are entertainment, high tech and the banks.
Those industries do not much compete with imports from China. The entertainment and high technology industries are most concerned about the safe distribution of their product inside China and good U.S relations with Beijing to ensure protection of its copyrights and patents by Chinese courts. Banks want to establish in China, and accomplish what Swiss USB has with its rare, for a foreign company, full banking license—a major engine of profits.
The currency and other trade issues require the United States to take assertive action, for example, tax the conversion of dollars into yuan I propose or a similar measure proposed by Massachusetts Governor Mitt Romney. However, the above mentioned industries, abusing the term free trade, staunchly oppose assertive U.S. actions and their campaign contributions stifle action in Washington.
Candidate Obama in 2008 promised to do something about Chinese protectionism but has blocked almost all meaningful U.S. actions since taking office.
Now Mitt Romney, the only GOP candidate to take up the issue, promises action but I question the strength of his convictions. In 2012, if Romney is the GOP candidate, both Messrs. Obama and Romney will need Hollywood, the Silicon Valley and Wall Street to finance their campaigns and that money may well again turn into influence and inaction regarding China.
During the last years of the Clinton presidency, then Treasury Secretary Larry Summers pushed through the repeal of Glass-Steagall and permitted depository institutions, who specialized in loans to individuals and business, to merge with financial houses that float initial public offerings, structure securities, trade and speculate in virtually anything that is tradable, and engage in almost any financial game where they can find a buck.
Now banks are no longer interested in lending money—the casinos can make bigger money attracting customers to invest and gamble in more exotic activities.
The 2010 Dodd-Frank Act was supposed clean up banking, but it did not address the separation of commercial and investment banking. Now, traditional banks are increasingly monopolized by large investment houses, which hold more than 50 percent of the deposits of ordinary business and individuals, and those investment houses are not interested in making loans to homeowners or small businesses. The economy can’t recover without adequate credit for those vital players.
Again, the importance of campaign contributions shines through. Banks have exerted great influence over the House and Senate Committees that draft legislation and conduct financial oversight, and at the U.S. Treasury and Federal Reserve, which is charged with coordinating federal regulation.
The business of America may be business, but as long as big money drives campaigns, American business will continue shrinking. Ultimately, the United States will face a crisis like the ones besieging Greece and wider Europe now.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. You can find him on Twitter @pmorici1.
RADIO FREE DYLAN – EPISODE #18 [December 2010] Which American trade and banking policies are direct obstacles to prosperity and job creation in this country? What is it about our trade policies that is costing jobs to not only be outsourced, but also for capital to leave our country as opposed to being driven into our economy? What’s the distinction between free trade and fair trade?