3 Politically Impossible Fixes for the Economy

As policymakers continue to fumble about in their endeavors to fix the U.S. economy, the business community has become very happy to weigh in. The problem, however, is that even some good ideas that Washington outsiders might have are politically impossible. Three such suggestions were offered today by former hedge fund manager and author Andy Kessler in a Wall Street Journal op-ed. Even though each might help on some level, each would be political suicide.

"QE Toxic"

Here's Kessler's first idea:

The Fed's quantitative easing has been focused on buying Treasurys as well as packages of high-quality mortgage assets. It's time to go back to the original TARP and start buying toxic assets directly from banks, no matter the price. If they become insolvent, set up the Treasury to inject capital a la TARP2 and allow the Federal Deposit Insurance Corporation (FDIC) to implement a quick-turnaround, prepackaged bank resolution and receivership. Clean those balance sheets up for good, else we relapse into financial crises again and again.

As Kessler says, TARP never actually fixed the problem for which it was designed. Banks were left with toxic assets, but they declared lots of losses, ramped up their capital, and everyone was content. Kessler worries that more losses are being hidden by banks, and he may be correct. Banks would likely argue that any future losses from toxic assets will hit gradually over time, and new higher capital will be sufficient to cushion them.

But even if Kessler is right, can you begin to imagine if politicians suggested the plan above? Public opinion on TARP is incredibly negative. Americans generally dislike the Fed too, due mostly to its opaqueness and allegiance to big banks. We've also seen high Wall Street compensation return -- so can you imagine a proposal involving the marriage of TARP and the Fed, which provides money to Wall Street while unemployment is near 10%? Suggesting this in Washington would be political suicide.

"Import Buyers"

But the public backlash that would result from Kessler's next idea could be even greater. This one is directed at the housing market's problems:

Someone has to step up and buy those 1.5 million extra homes in inventory. I would wager there is a backlog of high-paying jobs for educated foreigners well beyond what H1-B visas allow to trickle in. In the name of financial stability, create a million visas for qualified immigrants, say, those with a masters or Ph.D., and watch home prices start to rise.

Right. So now he wants politicians to say: "Okay America. We know unemployment is near 10%, but we're going to import workers from other countries to take high paying jobs so that they can buy the houses that Americans got kicked out of." Again, even if Kessler is right that there are high-skill jobs open that Americans couldn't qualify for anyway, it doesn't matter on a political level. There's no way anyone in Washington would ever begin to take this suggestion seriously, considering the anger it would cause among Americans.

"Wait"

And finally, there's this sensible approach:

Business deleveraging is an overhang for the economy, but it's really the consumer that is overdrawn. Digging through household liabilities numbers, I calculate that since 2006 consumers overshot by approximately $4 trillion in debt. Even at normal economic growth rates, that calls for at least seven years of consumer deleveraging. We're now three years into it. Bad policy (tax increases and regulatory burdens) will only extend it. You can't hurry up this deleveraging.

Indeed, this is likely the best and only way the economy will heal. It is just going to take time. But politicians don't have time. If you're in the House, then you are up for re-election every two years. Even the President has to worry about his job in 2012, when unemployment is still expected to be well above its natural rate. If policymakers are seen as doing nothing, then they will lose their jobs. No matter how true it is that politicians can't fix the problem, many Americans feel it's their responsibility to help.

The conflict between practical and political is not a new one, but it becomes particularly acute during economic turmoil. No matter how good some ideas might be, if a majority of Americans perceive them as helping others more than them, then Washington will treat the proposals as poisonous.