The powers of the Presidency may wane as the President becomes more and more of a lame duck, but in the last year of his Presidency even the most unpopular and powerless President has one ability remaining: he can booby-trap the economy for his successor. In American history, there are a number of examples of this.

The first example was probably accidental, since Andrew Jackson was an economic illiterate and his successor was his hand-picked favorite. Nevertheless, in 1836 Jackson booby-trapped the economy very successfully for Martin Van Buren by withdrawing the charter of the Second Bank of the United States. This caused money supply to collapse. Since there was very little gold in the United States at that time, and no federal note issue, Second Bank notes were the only currency with nationwide acceptance. Consequently, when the Second Bank was shut down, trade between Pennsylvania and Mississippi was only possible on the basis of local Pennsylvania or Mississippi bank paper, each of which traded at a substantial discount in the other state. Effectively, the United States had lost its common currency. Not surprisingly, a grinding six year recession followed, at the nadir of which in 1841 no fewer than eight states defaulted on their bonds, the last state defaults in US history. Only the California gold finds of 1849 restored the US monetary system to its usual liquid state.

Abraham Lincoln’s partisans often accused James Buchanan of booby-trapping the Union for Lincoln’s accession to office, but they could not accuse him similarly on the economy, which was thriving in 1861 after a short but nasty recession in 1857. The next booby-trap therefore, a somewhat more pre-meditated one, was that of Benjamin Harrison for Grover Cleveland in 1893. Harrison and the “billion dollar Congress” had both raised tariffs sharply by the McKinley Tariff of 1890 and spent the accumulated Federal surplus. Consequently Cleveland in 1893-97 was confronted both with a deep recession immediately and with a serious Federal budget and funding crisis in 1895, which he was compelled to call in J.P. Morgan to fix, an act which struck at the very foundations of Democrat ideology even then.

Herbert Hoover and his apologists later accused Calvin Coolidge of booby-trapping the economy for him in 1929, but there is no truth to this. The US economy was in excellent shape in March 1929, with only a speculative stock market froth causing concern. While a stock market crash was pretty well inevitable, Hoover caused the Great Depression almost single-handedly by raising tariffs though the notorious Smoot-Hawley Tariff of 1930 and then raising taxes, the top marginal rate from 25% to 63%, after the depression had reached full force. (The Federal Reserve also had a hand in it, by allowing the money supply to contract through bank failures.)

Hoover thus left Franklin Roosevelt with the opposite of a booby-trap situation; FDR only had to avoid economic policy as catastrophic as Hoover’s and the economy would recover on its own. FDR cleared this very low hurdle, but only just. The NRA protected monopolists and damaged the price mechanism, the Wagner Act hugely increased costs in heavy industry, the prohibition of the Gold Clause wrecked security of contract and the Securities Act of 1933 de-capitalized the brokerage industry, leading to a capital raising dearth that lasted a decade. As I said, better than Hoover, but not by much.

Lyndon Johnson undoubtedly booby-trapped the economy for Richard Nixon in 1969, although given his pathological nature he may have wanted his faithful but despised Vice President Hubert Humphrey to inherit the mess. Johnson ran the economy at full tilt, raising government spending at a hair-raising rate to fund both the Vietnam war and his expensive social programs, then raised taxes by 10% in his last year. The result was a very unpleasant recession in 1969-70, combined with an ongoing inflation problem that took a decade to fix. Nixon was no great economic thinker, but Nixonomics would have been remembered more fondly if he had not been forced to clear up Johnson’s mess.

Johnson’s legacy demonstrates a key feature of a successful economic booby-trapping: the outgoing President’s responsibility for hard times must be apparent only to dedicated economic mavens, so that to the general public the difficulties that appear with the new administration seem to be caused solely by the new President’s own incompetence. William McChesney Martin, Chairman of the Fed, was only too well aware of Johnson’s responsibility for the inflationary mess of the 1970s, as he set out in his memoirs, but the great majority of the public blamed the difficulties on Nixon, and later on Gerald Ford and Jimmy Carter, seeing Johnson’s years as the last period of real prosperity before problems descended.

After this survey of 200 years of chicanery, we come to the present, or at least the recent past. Unlike Andrew Jackson, Bill Clinton was highly economically literate, and there can be little doubt that he viewed with great pleasure the 1998-2000 manic phase of the dot-com bubble, realizing that his successor would have to deal with the inevitable following recession. (Like Johnson, his personality has elements of the pathological; he may well have relished leaving this poisoned legacy to his pompous and self-satisfied Vice President Al Gore rather than to the Republicans.) Purists might suggest that the stock market crash was timed a little early, since the first really bad month was November 2000, while Clinton was still in office, but Clintonites would no doubt claim that even the prospect of replacing their beloved master with George W. Bush was enough to spook traders.

George W. Bush however, while no economic genius, was well endowed with low cunning – he shared with Clinton the facility of being far more successful in arranging short term successes and public relations triumphs than in providing a sound long term future for the American people. Instead of just accepting the recession he had been endowed with, he cut taxes aggressively, following one substantial cut with a second cut targeted at reviving the stock market. He also persuaded Fed Chairman Alan Greenspan to slash interest rates far beyond the level that would have been considered appropriate at any earlier time.

Bush was lucky, too – his period of economic stimulus coincided with the peak of the Internet-led reshaping of the world economy, allowing low wage manufacturing centers to supply goods at a fraction of the cost of Western sources and thereby quelling inflation. Thus the normal effect of such aggressive money creation, a surge in inflation, was slow to appear and concentrated itself largely in the overheated housing market. As a political survivor of economic booby-traps, Bush deserves high marks, whatever his failings as long term steward of the US economy.

As a designer of booby-traps for his successor, Bush appears currently to deserve no more than a B. Having successfully combined excessively low interest rates with high budget deficits without causing inflation, Bush could regret that the inevitable credit crunch appeared in August 2007 rather than a year later. The emergency rate cuts by Ben Bernanke, from 5.25% to 3% for the Federal Funds rate, at a time when inflation is well over 4% even on the fudged official statistics, have managed so far to stage off disaster in the form of a deep recession and any more than a mild stock market downturn.

If Bush were due to leave office next week, he could regard himself as a remarkably successful booby trap designer. The economy would stagger on for only a few months at most, then fall prey to the triple whammy of a worsening housing downturn, an unavoidable credit crunch and rapidly increasing inflation. This would cause huge economic pain and a deep recession, but it would all be satisfactorily within the new President’s term, and Bush would be absolved from blame, except by economic historians who have few votes. How satisfying it would be to have the messianic Barack Obama blamed for the economic misdeeds of his two feckless baby-boomer predecessors!

However, it seems unlikely that disaster can be completely postponed as long as January 2009. Bernanke is beginning to run out of room to cut rates further – as was remarked in 2003-04, 1% is pretty well the lowest feasible level for the Federal Funds rate; below that level money market funds start going bust. Long term interest rates have stopped reacting to the Federal Funds rate and have started creeping back up, with the 10 year Treasury bond yielding around 3.8% today compared with 3.3% a month ago. Each month’s inflation numbers run the risk of cracking the market – it survived January’s unexpectedly high Consumer Price Index figure, but will not survive many more such. The economy and the market may well survive the summer of 2008, but a crash in September would still be four months before the change in administration, while Bush was still clearly in charge and expected to do something about it. Thus even if the worst effects of recession occurred under the next President, Bush is unlikely to escape blame from the populace as a whole.

It is to be hoped that the forthcoming recession clears the excesses out of the US economic system, so that the new President of 2013 at worst gets the inheritance of Franklin Roosevelt rather than yet another booby-trap to defuse. That requires 2009’s President not to find a way of dodging the booby-trap, as Bush did, but instead to engage in the politically highly unpleasant work of cutting the budget deficit, raising interest rates to quell inflation and restore saving and eliminating the US balance of payments deficit. Fortunately, if we cannot rely on the next President’s integrity, we should at least be able to rely on him lacking sufficient economic skill to avoid the fate that is in store.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)