Apparently the Obama administration would rather appease important constituencies than get the economy back on track. First they tried to pillory AIG in order to appease the mobs screaming for executive blood, then they fired the CEO of GM to appear to be "doing something" and now they are rewriting bankruptcy law in order to appease union supporters (not to mention supplanting state decisions with federal in the case of California and the SEIU). I am sure this is paying off in momentary support, some election funds, and a vast influx of promised votes, but I have a feeling Obama will come to regret this. After all, if the economy is still in the tank in 2010, all the union support in the world will not keep congress in his hands, and this is a formula certain to destroy the economy even more certainly than the massive inflation his budgets entail.

How so? In "Crippling Business" I wrote that his meddling with salaries, requiring accounting for all travel expenses, his prohibition against entertainment and all the other meddling will make it very difficult for financial firms to recover, and in "How AIG and GM Ruined Any Chance at a Less Intrusive Bailout" I described how such intrusive micromanagement will likely discourage any outside investors (wexcept perhaps any government "partner" banks Obama can force to sink money into failing auto firms. Add to this the efforts I described in "Continuing to Repeat Errors" and "Geithner's Problem", keeping the creation of worthless subprime loans at the same rate as before the collapse, and the banks themselves have become "toxic assets" no investor would touch*.

But now Obama is extending the destructive reach of the government beyond the financial and auto sectors. As his intervention in the Chrysler bankruptcy and California shows, any field in which unions may play a role, he will be willing to ignore the rights of others and force decisions in favor of unions. Now, admittedly, unions are not the massive presence they were in decades past (at least not now), but they are still common enough that such a threat is very frightening. For example, any lender who deals with companies who have unions as creditors can no longer count on their claim of being a preferred creditor being recognized, which means that no creditor will be willing to lend on the basis of being paid first, which means a large source of cheaper capital has now been destroyed, at least for any unionized industry. If the same principle is also applied to bond holders, and I see no reason why it wouldn't, this also just removed a significant amount of value from the bond market, as who wants to risk money in a "secure" investment which may be less secure than stocks? After all, if union claims come first, no matter what, then bonds are just stocks without voting rights or dividends.

Likewise, the action of the Obama administration, both the funneling of massive bailout money to the states, and the new message that that money is contingent upon appeasing unions, means that states have no incentive to economize. Any states which considered trying to attract or stimulate business through tax cuts will now learn that doing so will cause a serious blow to their federal funding. That may not seem damaging to states which do not want bailout money, but as they will still see their citizens taxed at exorbitant rates (or robbed through inflation) to pay for bailouts and huge budgets, they will still continue to suffer the ill effects of high taxes without receiving even the partial repayment the federal funds offer. In short, the feds will be robbing their citizens blind and providing even less than they give to other states if a state tries to cut their budget.

Add to all of this the massive expansions of credit required to support the continuing Fannie/Freddie backed mortgages (and subsequent, predictable Fannie/Freddie bailouts), and the huge inflation caused when the Fed buys up the trillion dollars a year in bonds created by the budget shortfalls (which will support about $2-$3 trillion in new credit), and we have a situation which could not be less favorable for economic recovery**.

And that, in the end, will be what will do in the current administration. They can pay off all the constituencies they want, but if the economy does not begin to recover then they will lose, first congress and then the White House. And once that happens, all the executive power they granted to Obama will be in the hands of the other party, which may be something for Democrats to consider before arrogating any more authority tot he executive branch.

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* In the interest of disclosure, I have to say I bought Citicorp when it hit $1 a share, but have since sold it off, as I expect the price to drop, if not now, sometime in the near future. I may be wrong about the stock, but I am not wrong about the underlying weaknesses and the threat that government represents to investors.

** Normally, the first flush of inflation would spur investment. But with the environment so hostile to investors, my bet is that any new money creation will either evaporate in some consumer good purchases, flow into solid values such as real estate (or maybe gold), creating a short lived property boom, or leave the nation entirely into overseas investments. Not that it matters, as the scale of Obama's inflation will mean there will be little time before we move from the false enthusiasm of early inflation into the destructive "stagflation" which precedes true hyperinflation.

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POSTSCRIPT

All of my writing on this topic can be found in the postscript to the article "Living Large During the Good Times".