Simply, what was broke and caused the financial crisis has not been fixed.
Banking is increasingly concentrated on Wall Street with the top five or six firms controlling about half of all deposits nationally. Even as the Fed pumps record amounts of money into the economy, these mega-banks have difficulty assessing local business projects. Small businesses that formerly relied on independent regional banks constantly complain "banks will give us a loan when we don't need one."
Big banks are happy to lend to multinationals like GM but much less so to their suppliers, and they are hamstrung by litigation and adopting to excessively cumbersome Dodd-Frank regulations. They are not alone—manufacturers complain that federal and state regulators make building,running and hiring increasingly difficult. Either CEOs can spend their best talent building their businesses, or fencing with regulators and in court—the Obama administration has made that choice for them.
Obamacare ladles on mandates, taxes and higher health insurance premiums, leaving consumers with fewer dollars to spend, and making businesses of all sizes even more reluctant to hire.
The $500 billion trade deficit—mostly on oil and with China and Japan—drags on demand for U.S. goods and services about three times more than recent tax increases. Drilling bans and restrictions off the Atlantic, Pacific and Gulf Coasts and in Alaska, and the reluctance of the Obama Administration to bring meaningful pressure on China and Japan to fairly value their currencies, make significant relief unlikely.
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Now the Energy Department is considering boosting liquefied natural gas exports, when keeping the new bounty from shale deposits at home to boost manufacturing would increase GDP and employment much more.
The Federal Reserve—by buying massive amounts of Treasury and mortgage-backed securities—has kept the big banks profitable and boosted the housing market. But low interest rates allow banks to reap profits and pay big bonuses with virtually free money. This puts off the necessary and inevitable restructuring of U.S. banking. Investment houses must be separated from commercial banks to reduce systemic risks, and large depositories like Bank of America have too many layers of bureaucracy. They make loans scarcer, more expensive and cumbersome to obtain than they need to be.
The housing market continues to recover but new home construction is less than 3 percent of GDP and cannot power a recovery. Moreover, easy Fed policies are creating new bubbles in big city markets—low interest rates are elevating prices above what incomes will sustain when the Fed takes its foot off the accelerator. Asset bubbles are appearing in other markets—stock, corporate debt and agricultural land.
In the near term, the Fed can keep the economy growing at a modest pace, but without better regulatory, health-care, trade and energy policies, Americans face slow growth, higher taxes and stagnant or falling wages.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.
