This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Saturday, November 27, 2010

How Republicans Saved the Economy

The following is, or could be, a transcript from a high school history teacher’s lecture in the year 2030 on Obama’s first term. It is a continuation of the lecture series that began with “How Obama Saved the Economy,” written in October of 2009.

Just twenty-two months into Obama’s first term, his party suffered a major setback in midterm elections in what amounted to a referendum on policy shifts that had been occurring in Washington.

In the 2010 elections Democrats lost control of the House of Representatives, a half dozen Senate seats, as well as roughly a dozen states’ governors’ offices. The result was a much more equal distribution of power around the country and gridlock achieved in Washington.

The loss of the Democrats’ supermajority in the House was particularly decisive, as President Obama’s ability to push through new spending bills was essentially crippled.

Much more significant, though, was what unfolded after the beginning of the 112th Congress and inauguration of new governors in 2011. While Democrats still controlled the Senate and the White House, there was a noticeable change in policy that almost immediately began to produce tangible impacts on the American economy.

Before the Democrats lost their grip on government, President Obama had been able to push through an economic stimulus bill, a Healthcare reform bill, and a financial reform bill. At the time of the midterms Obama was still pushing for cap and trade legislation, which would have put expensive restrictions on carbon outputs and had been the source of much controversy among the business community.

Unfortunately, as many had previously forecast, these policies did not serve to help the United States’ economy. Instead they injected significant uncertainty into the business community and stifled its recovery from the financial crisis of 2008.

With the government passing expensive legislation like healthcare reform and proposing cap and trade laws, businesses effectively stopped expansion plans because they could not know how much their costs of doing business or hiring employees might change.

Before the midterm elections Democrats had held a supermajority in the House, as well as control of the Senate, White House, and the governors’ offices of most states. With such complete control, they had no reason to listen to or cooperate with Republicans, much less their constituents; so they didn’t.

Once the wrath of voters was felt at midterm elections, however, Democrats had no choice but to begin shifting their policies in a cooperative dialogue with Republicans to improve the economy. They quickly realized that real economic growth – substantiated by significant improvement in employment figures – would be the only way those remaining Democrats would win sufficient support among constituents to ensure their reelection in 2012.

In a move that was wildly popular among voters, particularly the supporters of the then-popular “Tea Party” Movement, incoming Republicans applied considerable pressure and succeeded in reversing many of the policy trends previously being pursued by Washington’s far-left Democrats.

Most notably, through additional influence on policy making Republicans were able to substantially loosen the stranglehold of regulation on the economic recovery which had already begun – to some extent – before the elections of November, 2010.

The government correctly decided that their budget

was better spent educating the public on the detection of fraud.

Thankfully legislators, after January 2011, halted their aggravating increase of regulation on the financial sector. Having finally realized that added regulation would not halt the perpetration of frauds and schemes on the investing public, the government correctly decided that their budget was better spent educating the public on the detection of fraud. In this way they were able to limit the impact of future schemes and effectively prosecute those rare cases of criminal wrongdoing.

More importantly for the economy as a whole, Republicans were able to ease oversight on the energy sector, a path many had originally encouraged Democrats to pursue when Obama first entered office.

With Obama’s inauguration the United States was caught at a crossroads. At the time global warming was still trusted, more as a religion than a theory; and increasing pressure among environmentalists at largely limited the use of many sources of energy abundant in the US. However, there was also a growing concern among informed Americans (and rightly so) of the nation’s growing dependence on foreign energy, especially oil.

By easing government energy regulation, the private sector was able to pursue power sources without fear of political pressure. Investment in new projects surged immediately as large power companies began building new facilities to power the US through a re-industrialization period.

These and other major projects were made possible largely due to another avenue pursued by Republicans: that of pressuring the Federal Reserve to force banks to start making loans.

Up until that point, the Fed, under the guidance of Chairman Ben Bernanke, had been paying interest to banks that held excess reserves on deposit at the Federal Reserve. Oddly enough, most of these reserves had actually been provided BY the American taxpayers in the form of low-interest loans legislated by bailout packages.

When Republicans began pressuring Bernanke to stop paying interest to banks on these excess reserves, and actually begin charging a holding fee, banks immediately began scouring the market for opportunities to make loans.

Of course, the United States had endured a lengthy deleveraging process following the financial crisis of 2008, and most American consumers and corporations were surviving just fine without borrowing. In fact, at the time American non-financial companies had racked up significant cash holdings totaling roughly $2 TRILLION.

However, because the Fed encouraged banks to make loans, cheap credit was readily available to fund further expansion projects that had been previously unaffordable. Of course, as new facilities were being built and opened they not only need employees, but those workers required food, homes, and other goods and services.

Between the employment needed to execute new expansion projects, as well as the peripheral jobs created to help provide for the newly employed, the encouragement of loan creation by American banks was able to lower unemployment significantly.

What’s more, all these workers in periphery jobs, once employed, now had a demand for goods and services. The trickle-down effect of job creation turned out to be enormous, and was just what the US economy needed to jump start a recovery not previously seen since the early 1980s.

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