The Great Recession was caused 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.
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 oil. When dollars earned by producing goods in the United States go abroad to purchase imports but do not return to purchase exports, either inventories build 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 mortgage backed securities to foreign and U.S. investors they knew would fail.
For a time, the proceeds from churning property and second mortgages permitted Americans to use their homes as ATMs and consume much more than they produced. In a nutshell that permitted a $700 billion trade imbalance and full employment-the economic equivalent of a perpetual motion machine.
When the house of cards collapsed, the Great Recession resulted. Until oil and trade policy are fixed and the banks made to serve the public purpose and shareholders, as opposed to the interest of traders and senior management, the U.S. economy can't recover.
President Obama has done just about everything in his power to make matters worse.
He has dramatically slowed development of U.S. oil and gas development at a time when China, rich with dollars from currency market intervention, is driving up the price of all commodities. He has failed to "do business" with Chinese mercantilism. The trade deficit continues to pull down domestic demand, but this time there is no housing boom
He has left the worst perpetrators of the financial crisis, New York bankers, safe in their perches-trading away and contributing to candidates sympathetic to the status quo. Those have found new outlets for their energy and no longer want to make bad loans and sell securities backed by those to unwitting investors.
New York banks enjoy, too much, recycling and trading all those Asian and Middle East dollars, and the big paydays that result, to support real changes in our trade, energy and banking policies. With the support of the Wall Street Journal, bankers are trying desperately to finance either the election of another President sympathetic to their views or the reelection of Mr. Obama. Consider the Journal's recent pillory of Mr. Romney for advocating realistic trade policies toward China.
And so it goes, the Fed vainly tries to resuscitate a failing U.S. economy but until we get a President who will drill for oil, tax the conversion of dollars into yuan to offset Beijing's currency market intervention, and split commercial banking from other financial activities on Wall Street, we are simply not getting out of this mess.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.