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Barack Obama is 'screwing up' on the economy. Be very afraid.
Posted By: Iain Martin at Feb 12, 2009 at 13:35:52 [General]
Posted in: Politics , Three Line Whip , Eagle Eye
Bank bail-out, Barack Obama, Martin Wolf, recession, Tim Geithner, Treasury Secretary
It's a little early to right-off Barack Obama's presidency you might think. He's only been in the post for a few weeks, there are wonderful pictures in circulation of him and his wife looking preternaturally cool like the Kennedys and he is very popular. The consequences of him failing do not bear thinking about.
So, we all want him to be the calm guy in the Oval office in the disaster movie who gets the world through a terrifying crisis. Unfortunately, real life is usually a little more complicated.
To that end, if you didn't get a chance to read Martin Wolf's column in the FT yesterday, then take the time. It makes a powerful case which is genuinely troubling.
Wolf thinks Obama may already have fluffed his biggest calls on the only subject that matters right now - the economy - and that he's in trouble.
"Hoping for the best is what one sees in the stimulus programme and - so far as I can judge from Tuesday's sketchy announcement by Tim Geithner, Treasury secretary - also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years' economic crisis, has let Congress shape the outcome.
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this "progeny of the troubled asset relief programme" fails, Mr Obama's credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it."
Geithner in particular has been unimpressive. When I look at him I am not filled with confidence, rather with trepidation.
Wolf has been arguing, as some of us have, for the kind of game changer which puts a floor under the crisis. In my view, reluctantly, that's further nationalisation to dramatically rationalise knackered banks, put a widely agreed price on debts and from there build a platform on which recovery becomes possible.
Instead, we are carrying out running repairs every few months (as the Japanese did disastrously in their long slump) rather than learning from the Swedes (who got the pain out of the way and could then refloat a rationalised banking system back out into the private sector).
I'll leave the last word to Wolf:
"The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new "good banks", leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new "bad banks", leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.
By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late."
Why Obama’s new Tarp will fail to rescue the banks
By Martin Wolf
Published: February 10 2009 18:06 | Last updated: February 10 2009 18:06
Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.
Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.
All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.
Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.
Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.
Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”.
The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it. ...
Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.
If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.
The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.
By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.
Originally posted by Dbriefed
reply to post by kozmo
I think it has less to do with Obama than his economics advisory team and Treasury Secretary Geitner, who led the NY Fed into the mess. Why do these administrations keep hiring the people who screwed it up?
Originally posted by kozmo
First, please post evidence that Bush caused the current crisis.
From the start, George W. Bush's embraced a governing philosophy of deregulation. That perspective trickled down into the federal oversight agencies, which in turn eased off on banks and mortgage brokers. Bush did push early on for tighter controls over Fannie Mae and Freddie Mac but failed to move Congress. And after the Enron scandal he backed and signed the aggressively regulatory Sarbanes-Oxley Act. But when his second head of the SEC, William Donaldson, tried to boost regulation of mutual and hedge funds, he was blocked by Bush's advisors at the White House and other powerful Republicans, and quit. Plus, let's face it, the meltdown happened on Bush's watch.
Originally posted by Regenmacher
You haven't seen anything yet, just wait til the commercial real estate market implodes this year.
Worst economic collapse ever
Gerald Celente, U.S. trend forecaster.
Originally posted by RussianScientists
The OP is a foolish FEAR MONGER!!!!!!!!!!!!!!!!
President Obama just got into office, for the few weeks he has been in office he is making some needed changes, and is scoping out others. If he can keep it up at this pace, in four years time he will be one of our greatest Presidents.