Tamny: Maybe Many Of Our Current Economic Woes Are Bush's Fault After All

UPDATE @ WHD: PRESIDENT OBAMA AND THE NEXT FINANCIAL CRISIS

.....BUT OBAMA HAS OUT-DONE BUSH

I HATE TO POST THIS. I really do. It's not what conservatives like to see or hear. This is nothing new, mind you. But it bears repeating: Bush and Obama both did their share to get us into the fiscal mess we're in today. If you don't believe me, then John Tamny has a little review of the historic facts to help us remember. You see, Bush gave us a falling dollar (which made food, gas and precious metals more expensive), the first bailout and---worst of all---Ben Bernenke as Fed chairman. Read on and you will hear, the midnight ride of Paul Revere.....

By John Tamny for RealClearMarkets

To say that President Obama is economically illiterate is to state the obvious. But what's not said enough is that to a high degree he's doubled down on Bush economic errors of the bailout and weak dollar variety, not to mention his inheritance of Bush's cruelest economic blessing whom he re-appointed: Ben Bernanke.

THE BERNANKE FED PROMISES TWO MORE YEARS OF ECONOMIC PAIN

Partisan Republicans love to point out that President Obama always blames his predecessor for the limp economic outlook, while never looking inward. They have a point about Obama being hopeless on economic matters, but the reality is far more nuanced.

If honest they would acknowledge the greater truth that much of what ails us today actually is George W. Bush's fault. Indeed, it was his administration that instituted a bailout culture that tautologically restrains recovery for failed ideas being propped up at the expense of good ones.

Secondly, it was the Bush administration's jawboning of China, along with tariffs on steel, softwood lumber and shrimp that signaled to the markets its preference for a weaker dollar. As is always the case, a falling dollar authored a rush to the real; specifically a recessionary rush into the dead money sector that is housing.

Lastly, the Bush administration, cheered on by happy talking Republicans who said at the time of his nomination that our present Fed Chairman understood inflation to be a monetary phenomenon, "gifted" Obama with Ben Bernanke. Bernanke, a walking talking economic fallacy holds powerful economic levers, and his machinations weigh more negatively on the Obama economy than anything else.

So while it's once again popular today among Republicans to bemoan Obama's economic illiteracy, to a high degree he's simply mimicking the policy failures of Bush on bailouts, the dollar, plus he re-nominated Bernanke as our nation's most powerful central banker. Sadly for Obama, particularly given the looming elections, is that his Fed Chairman on Tuesday implicitly or unwittingly promised the American people at least two more years of economic pain.

The answer why is basic economics. As most economists, and as most sentient non-economists know, price controls meant to hold down the natural price of anything lead to scarcity. Looked at in terms of apartments, when governments restrain rental costs they create a disincentive among apartment developers to build more of them. Why build more apartments if regulations will disallow profitable rental of same?

Considering the Fed, its control over the short rate for credit is a price control like any other. And the Fed, with its actions never restrained by basic economic logic, has promised to keep the rate it sets at "extraordinarily low levels" until 2013. Translated, the Fed will use its powers to keep interest rates below the natural levels that would prevail if the short rate for credit were floated.

What this logically means for those desirous of credit is that they'll suffer scarcity in much the same way those in the market for apartments in rent-controlled cities do. If the reward for saving is artificially low, and there is no credit without savers, there will be less credit.

Evidence supporting the above claim is already here. As William Ford (former Atlanta Fed president) wrote recently with AIER research fellow Polina Vlasenko, aided by Fed efforts to keep it low, the 10-year Treasury is yielding near 2% versus an average yield of 7% during the nine previous economic recoveries.

Unnaturally low yields by definition drive away savers, not to mention that those foolish enough to save aren't being compensated with the income that they'd normally receive. There are no jobs without individuals saving first, and absent these artificially low rates that punish those who might provide capital to job creators, Ford and Vlasenko contend that the unemployment rate would be 6.8%.

Price controls on interest rates are serving as capital formation repellents, and with the Fed promising to maintain them for another 21 months, job creation will be subdued. What the Fed misses here is that the best interest rate is one set by unfettered markets given the simple truth that a free interest rate matches the needs of lenders and borrowers. Zero interest rates don't compensate lenders, thus making credit scarce on the way to once again, reduced job creation.

Sadly, the story gets worse. In order to keep rates artificially low, the Fed will essentially have to conduct another round of quantitative easing that promises to weigh on the value of the dollar. Investors are by definition in the business of buying future income streams, but if their capital commitments made with an eye on returns are to be met with devaluations that will reduce the value of those returns, logic says they'll continue to seek out the hard assets of yesterday as an inflation hedge.

Back in April, I wrote a column titled "Don't Wait For GDP, $1500 Gold IS the Recession", and the point there was that the weak dollar that $1500 gold signified ensured that more and more limited capital would flow into inflation hedges, as opposed to the innovative ideas and income streams of tomorrow. $1772 gold signals even worse, as in an even more pronounced flow of capital into defensive plays over the innovators who author economic progress.

After that, a Fed Chairman who tells anyone dim enough to listen that he's one of the Great Depression's foremost scholar labors under a fundamental misunderstanding about recessions. Bernanke believes that economies need support during downturns, and as such, he's using the power of the Fed to prop up the failed business concepts that would otherwise vanish were market forces allowed to work their magic.

This too promises to weigh on economic growth in that far from bad things, recessions are good for cleansing the economy of the failures to ensure that winning ideas receive capital in abundance. In that very real sense it should be said that recessions are in fact the periods of malinvestment that we're experiencing right now thanks to a falling dollar, while the inevitable downturn that results from this, and that will be called a recession, should be referred to as our economic rebirth.

Put more simply, the "recession" that Bernanke is cruelly trying to help us avoid is in fact a signal of an economy on the mend as the malinvestment and misuse of labor is reversed. But ever eager to "support" the "weak economy", Bernanke is in fact prolonging the pain for his fine tuning delaying the reorientation of capital to higher uses that would author a more powerful rebound.

When you combine the impact of Bernanke's actions, it becomes apparent that one man negatively weighs on our economic health more than any other policy, president, or Congress. For the Republicans who cheered his nomination, they should hang their heads in shame.

As for Obama, assuming he even wants to be reelected the single best move to cheer voters would be to fire our hapless Fed Chairman at the earliest possible moment. That, or wait until the weekend before the 2012 elections. Sending Bernanke back to academia would surely boost the spirits of voters acutely suffering from his gargantuan errors, and would put past "October Surprises" to shame.