WHAT REALLY SPOOKS OBAMA

GEORGE KEREVAN …examines events in America.

YOU will not know it from reading the British media but the Obama administration has suddenly been beset by multiple political scandals that have evoked the spectre of Richard Nixon and the Watergate cover-up. 

Even the doughty Daily Telegraph – yes the Tele itself - ran an article on Saturday excoriating the risible notion that Obama could be likened to Nixon, and that any suggestion of such was merely the ravings of the swivel-eyed loons of the US right.

That’s not how it is being reported in America, where the shenanigans of the Obama White House, now the election has been safely won, have exploded all over the front pages.

OBAMA’S FOUR SCANDALS

First: the startling news that during the 2012 presidential campaign the US tax authorities, the IRS, had filtered applications for tax-exempt status from political organisations that were anti-Obama. The IRS targeted any campaign funding bodies with the words "Tea Party" or "Patriot" in their name – code for the Republican right wing.

After the scandal broke last week, Obama immediately fired the acting IRS director.  However, there remains the obvious question: how did a culture emerge inside the IRS that was so politically partisan?

Second: another scandal emerged when Associated Press was informed by the US Justice Department that reporters' phone records had been secretly subpoenaed as part of an investigation into a leak concerning national security. Whatever the seriousness of the leak (which involved an agent’s identity) it is not done in America to snoop on the free press and to do it secretly.

What has really raised the ire of the US media is that the secret subpoenas were initiated using the Patriot Act, the domestic security legislation passed in the wake of 9/11 to combat al-Qaeda terrorism.

Third: then there is continuing controversy over the murder of the US Ambassador and three other Americans in Libya last year. There is no doubt that in the wake of the killings the White House seemed confused as to what happened and made contradictory statements.  Some suggested that an anti-Islamic video up-loaded on to YouTube spontaneously provoked the outrage. However, later evidence indicates the attack was a premeditated al-Qaeda assault. The Republicans have initiated a Congressional inquiry.  Though this one smacks less of cover-up and more of cock-up, the White House has been rather truculent in its handling of the affair – suggesting a bunker mentality.     

Fourth: the row over Operation Fast and Furious. This is the cover name for a plan by the Obama Justice Department to allow criminals to buy weapons in the United States in the hope that they could be traced to drug barons in Mexico. But the scheme went horribly wrong and 2,000 guns ended up – untraced – in the Mexican underworld.

The plot came to light when a US Border Patrolman called Brian Terry was killed and two of those weapons were recovered at the murder. In a Nixon-like stance, President Obama has invoked “executive privilege” to stop the House of Representatives gaining access to key Justice Department files relating to Operation Fast and Furious.

Independently, each of these incidents is less significant than the Watergate bugging of the US Democrats in 1972 (I happened to be in Washington the night of the infamous break-in). However, the emergence of all four simultaneously might suggest a pattern: a growing “second term” arrogance in the White House, and a dangerous readiness to see the Republican opposition as somehow “outside” the democratic process and worthy of contempt and disdain. The latter attitude has hardly helped in the ongoing process of negotiating a deal to curb the US budget deficit.

CHICAGO
Political Europe, left and right, still remains in awe of President Obama and his magnificent rhetorical skills. My own view has always been more sceptical. Rhetorical ability is not the same thing as leadership. Obama is a product of the old Chicago Democratic political machine. The latter has a bad historical reputation for bullying, corruption, nepotism, and dirty tricks.

First-term Senator Obama did not seize the Democratic nomination from front-runner Hilary Clinton in 2004 just because of his ability to make a good speech. He carefully courted the Democratic hierarchy that feared a Clinton White House would be too independent. Barack Obama is a machine politician to his fingertips. And like any machine politician, he obsessed with survival and beating the opposition. That can sometimes lead to taking dangerous risks that come unstuck.

That said, despite the battering he is taking in the media, President Obama’s popularity has not suffered. The latest CNN/ORC poll finds that despite the controversies surrounding the IRS and the attacks in Benghazi, Obama still enjoys a 53 per cent approval rating - up from 51 per cent in April.  The reason is not hard to see: the state of the economy.

OBAMA’S BRIGHT SPOT: THE ECONOMY

The brightest star in the economic firmament is the US housing market, which is clearly on the mend. The share price of construction companies is now outpacing the market. In addition, with the Federal Reserve buying $85bn in Treasuries and residential mortgage-backed securities a month, and so pushing down bond yields, the stock market has gone to record levels. All this is starting to make consumers feel good again. And when consumers feel better off, the President’s poll numbers go up in tandem.

However, there are weak spots in the American economy. While job numbers have improved, they remain well below the levels necessary to bring down the unemployment rate.  Economic growth remains below par, which has led former Fed Chairman Paul Volcker to suggest that trend GDP may have fallen to 2 per cent with the bursting of the financial bubble.

Another problem concerns inflation. Amazingly, US inflation is actually negative. The CPI index fell 0.4 per cent in April after a 0.2 per cent decline in March. In the short-run that is adding to consumer real income but it is worrying for the future if it hurts business confidence.

How can prices be falling when the Fed seems to be printing money like confetti? In fact, the broad money measure (which includes sophisticated money accounts as well as cash and bank reserves) has flat-lined dangerously, implying outright deflation is in the offing.

Here is one possible explanation: the cash being minted by the Fed is ending up largely back there in the form of bank reserves. So where is the money coming from to fund the stock market boom? Answer: from existing money market funds. However, the latter are counted as part of the broad money supply. The amount of cash in US dollar money market funds has dropped sharply since the beginning of the year as the cash was used to buy equities, funding the stock market surge. Thus broad money drops.

So what? There are two things two worry about here. First, with most of the cash previously in money market funds now gone, the fuel to keep the US stock market surging has gone. Second, unless US banks use their bloated reserves to fund an expansion of lending, there is a potential shortage of liquidity in the American economy.

All of which means that the real problem stacking up for the Obama White House is not its spat with the Republicans but the long-term health of the economy.  On the other hand, just when he needs his wits about him, President Obama could find himself distracted by domestic political scandals of his own making.