Washington the biggest threat to economic recovery

Politicians of both parties are giving us lessons in how to snatch defeat from the jaws of victory. The victory in this case is economic recovery. There are many signs that the economy is on the mend from the financial crisis, even though the employment figures have not improved.

Yet foolish anti-business rhetoric, poorly timed policy announcements, uncoordinated legislative proposals, populist appeals and ideological rigidity are threatening the recovery.

The latest moves in Washington have shaken investor confidence, contributing to a temporary halt in the stock market rally.

That in turn likely will lead to a new decline in consumer confidence and delay a rebound in consumer spending and business investment. All are needed for the incipient recovery to take hold.

As unemployment figures have remained high, housing prices have stayed low and wages have stagnated, the one hopeful sign for many workers has been that their 401(k) balances have begun to recover from the damage they suffered in 2008 and early 2009. That hopeful sign has been tainted.

The latest bout of Wall Street weakness was triggered, at least in part, by the Obama administration’s announcement that it will seek to impose new levies on the nation’s largest banks. A few days later, the administration announced plans to put limits on the size of the nation’s financial firms and force them to choose between commercial banking and activity that could include investment banking, proprietary trading and running hedge funds.

While some of the steps may be justified, the timing of the announcements — while the economy is showing the slightest signs of recovery and when banks are being urged to increase lending to businesses to help that recovery blossom — could not have been worse.

Further, these moves came after the House of Representatives had passed a financial-reform bill and while the Senate was working on its reform package, showing a lack of coordination in the government.

The proposals should have been submitted to Congress at the beginning of the financial-reform debate, not near its completion.

If these policies could not be decided on by the administration in time to be part of Congress’ deliberations, they should have been held until the economy was on firmer footing. There was no need to rush them.

As it is, they look like punitive steps seized upon to feed on populist anger at the banks and their compensation policies, rather than carefully considered policy proposals, especially given that they lack detail in key areas.

As a result, they simply introduced an additional level of uncertainty into the stock market, and the stock market always seems to react badly to uncertainty.

The situation was compounded two weeks ago when 30 senators from both sides of the aisle — 11 Democrats, one independent and 18 Republicans — bowing to populist winds, voted not to back Federal Reserve Chairman Ben Bernanke for a second four-year term.

Surveys show that most in the financial community wanted Mr. Bernanke to stay on as chairman. Still, uncertainty about whether he would continue in that role was another weight on the stock -market.

An inability to determine what will now happen to the health care reform bill and the cap-and-trade environmental legislation, given the change in the composition of the U.S. Senate, also weighs heavily on the minds of investors.

However, given that both parties in Congress now are eyeing the November midterm elections and are unlikely to cooperate on any meaningful legislation between now and then, businesspeople and investors should husband their resources and wait for better days.

Unfortunately, that likely means a continued weak economic recovery.