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Obama On The Ropes

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You’ve been reading it everywhere and hearing it from scores of TV pundits:  The ongoing economic crisis could destroy President Obama’s hopes for a second term.  In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012.  Dean’s statement was unequivocal:  “I think she could win.”

I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House.  A chorus of commentators has begun singing that same tune.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people.  After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.

Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, in a piece she published on William Black’s New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

*   *   *

In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:

“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”

With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer.  Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner.  Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011.  At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery.  I remember that fall of 2009 as a very frustrating one.  It was very clear to me that the economy was still struggling, but the will to do more to help it had died.

There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit.  A number of us tried to make the case that more action was desperately needed and would be effective.  Normally, meetings with the President were very friendly and free-wheeling.  He likes to hear both sides of an issue argued passionately.  But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough.  As luck would have it, the next day, a reporter asked him if he ever lost his temper.  He replied, “Yes, I let my economics team have it just yesterday.”

By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”.  Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal.  Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012.  Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years.  The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):

During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.

By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”.  Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin.  Barack Obama is probably suffering from some awful nightmares about that possibility.


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Those First Steps Have Destroyed Mid-term Democrat Campaigns

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September 6, 2010

The steps taken by the Obama administration during its first few months have released massive, long-lasting fallout, destroying the re-election hopes of Democrats in the Senate and House.  Let’s take a look back at Obama’s missteps during that crucial period.

During the first two weeks of February, 2009 — while the debate was raging as to what should be done about the financial stimulus proposal — the new administration was also faced with making a decision on what should be done about the “zombie” Wall Street banks.  Treasury Secretary Geithner had just rolled out his now-defunct “financial stability plan” in a disastrous press conference.  Most level-headed people, including Joe Nocera of The New York Times, had been arguing in favor of putting those insolvent banks through temporary receivership – or temporary nationalization – until they could be restored to healthy, functional status.  Nevertheless, at this critical time, Obama, Geithner and Fed chair Ben Bernanke had decided to circle their wagons around the Wall Street banks.  Here’s how I discussed the situation on February 16, 2009:

Geithner’s resistance to nationalization of insolvent banks represents a stark departure from the recommendations of many economists.  While attending the World Economic Forum in Davos, Switzerland last month, Dr. Nouriel Roubini explained (during an interview on CNBC) that the cost of purchasing the toxic assets from banks will never be recouped by selling them in the open market:

At which price do you buy the assets?  If you buy them at a high price, you are having a huge fiscal cost. If you buy them at the right market price, the banks are insolvent and you have to take them over.  So I think it’s a bad idea.  It’s another form of moral hazard and putting on the taxpayers, the cost of the bailout of the financial system.

Dr. Roubini’s solution is to face up to the reality that the banks are insolvent and “do what Sweden did”:  take over the banks, clean them up by selling off the bad assets and sell them back to the private sector.  On February 15, Dr. Roubini repeated this theme in a Washington Post article he co-wrote with fellow New York University economics professor, Matthew Richardson.

Even after Geithner’s disastrous press conference, President Obama voiced a negative reaction to the Swedish approach during an interview with Terry Moran of ABC News.

Nearly a month later, on March 12, 2009 —  I discussed how the administration was still pushing back against common sense on this subject, while attempting to move forward with its grandiose, “big bang” agenda.  The administration’s unwillingness to force those zombie banks to face the consequences of their recklessness was still being discussed —  yet another month later by Bill Black and Robert Reich.  Three months into his Presidency, Obama had established himself as a guardian of the Wall Street status quo.

Even before the stimulus bill was signed into law, the administration had been warned, by way of an article in Bloomberg News, that a survey of fifty economists revealed that the proposed $787 billion stimulus package would be inadequate.  Before Obama took office, Nobel laureate, Joseph Stiglitz, pointed out for Bloomberg Television back on January 8, 2009, that the President-elect’s proposed stimulus would be inadequate to heal the ailing economy:

“It will boost it,” Stiglitz said.  “The real question is — is it large enough and is it designed to address all the problems.  The answer is almost surely it is not enough, particularly as he’s had to compromise with the Republicans.”

On January 19, 2009, financier George Soros contended that even an $850 billion stimulus would not be enough:

“The economies of the world are falling off a cliff.  This is a situation that is comparable to the1930s.  And once you recognize it, you have to recognize the size of the problem is much bigger,” he said.

On February 26, 2009, Economics Professor James Galbarith pointed out in an interview that the stimulus plan was inadequate.  Two months earlier, Paul Krugman had pointed out on Face the Nation, that the proposed stimulus package of $775 billion would fall short.

More recently, on September 5, 2010, a CNN poll revealed that only 40 percent of those surveyed voiced approval of the way President Obama has handled the economy.  Meanwhile, economist Richard Duncan is making the case for another stimulus package “to back forward-looking technologies that will help the U.S. compete and to shift away from the nation’s dependency on industries vulnerable to being outsourced to low-wage centers abroad”.  Chris Oliver of MarketWatch provided us with this glimpse into Duncan’s thinking:

The U.S. is already on track to run up trillion-dollar-plus annual deficits through the next decade, according to estimates by the Congressional Budget Office.

“If the government doesn’t spend this money, we are going to collapse into a depression,” Duncan says.  “They are probably going to spend it.   . . . It would be much wiser to realize the opportunities that exist to spend the money in a concerted way to advance the goals of our civilization.”

Making the case for more stimulus, Paul Krugman took a look back at the debate concerning Obama’s first stimulus package, to address the inevitable objections against any further stimulus plans:

Those who said the stimulus was too big predicted sharply rising (interest) rates.  When rates rose in early 2009, The Wall Street Journal published an editorial titled “The Bond Vigilantes:  The disciplinarians of U.S. policy makers return.”   The editorial declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.”

But those who said the stimulus was too small argued that temporary deficits weren’t a problem as long as the economy remained depressed; we were awash in savings with nowhere to go.  Interest rates, we said, would fluctuate with optimism or pessimism about future growth, not with government borrowing.

When in doubt, bet on the markets.  The 10-year bond rate was over 3.7 percent when The Journal published that editorial;  it’s under 2.7 percent now.

What about inflation?  Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment, and that this time should be no different.  Sure enough, key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now, and Japanese-style deflation is looking like a real possibility.

Meanwhile, the timing of recent economic growth strongly supports the notion that stimulus does, indeed, boost the economy:  growth accelerated last year, as the stimulus reached its predicted peak impact, but has fallen off  — just as some of us feared — as the stimulus has faded.

I believe that Professor Krugman would agree with my contention that if President Obama had done the stimulus right the first time – not only would any further such proposals be unnecessary – but we would likely be enjoying a healthy economy with significant job growth.  Nevertheless, the important thing to remember is that President Obama didn’t do the stimulus adequately in early 2009.  As a result, his fellow Democrats will be paying the price in November.




Failed Leadership

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July 8, 2010

Exactly one year ago (on July 7, 2009) I pointed out that it would eventually become necessary for President Obama to propose a second economic stimulus package because he didn’t get it right the first time.  As far back as January of 2009, the President was ignoring all of the warnings from economists such as Nobel Laureate Joseph Stiglitz, who forewarned that the proposed $850 billion economic recovery package would be inadequate.  Mr. Obama also ignored the Bloomberg News report of February 12, 2009 concerning its survey of 50 economists, which described Obama’s stimulus plan as “insufficient”.  Last year, the public and the Congress had the will – not to mention the sense of urgency – to approve a robust stimulus initiative.  As we now approach mid-term elections, the politicians whom Barry Ritholtz describes as “deficit chicken hawks” – elected officials with a newfound concern about budget deficits – are resisting any further stimulus efforts.  Worse yet, as Ryan Grim reported for the Huffington Post, President Obama is now ignoring his economic advisors and listening, instead, to his political advisors, who are urging him to avoid any further economic rescue initiatives.

Ryan Grim’s article revealed that there has been a misunderstanding of the polling data that has kept politicians running scared on the debt issue.  A recent poll revealed that responses to polling questions concerning sovereign debt are frequently interpreted by the respondents as limited to the issue of China’s increasing role as our primary creditor:

The Democrats gathered on Thursday morning to dig into the national poll, which was paid for by the Alliance for American Manufacturing and done by Democrat Mark Mellman and Republican Whit Ayers.

It hints at an answer to why people are so passionate when asked by pollsters about the deficit:  It’s about jobs, China and American decline.  If the job situation improves, worries about the deficit will dissipate.  Asking whether Congress should address the deficit or the jobless crisis, therefore, is the wrong question.

*   *   *

About 45 percent of respondents said the biggest problem is that “we are too deep in debt to China,” the highest-ranking concern, while 58 percent said the U.S. is no longer the strongest economy, with China being the overwhelming alternative identified by people.

As I pointed out on May 27, even Larry Summers gets it now – providing the following advice that Obama is ignoring because our President is motivated more by fear than by a will to lead:

In areas where the government has a significant opportunity for impact, it would be pennywise and pound foolish not to take advantage of our capacity to encourage near-term job creation.

*   *   *

Consider the package currently under consideration in Congress to extend unemployment and health benefits to those out of work and support to states to avoid budget cuts as a case in point.

It would be an act of fiscal shortsightedness to break from the longstanding practice of extending these provisions at a moment when sustained economic recovery is so crucial to our medium-term fiscal prospects.

Since our President prefers to be a follower rather than a leader, I suggest that he follow the sound advice of The Washington Post’s Matt Miller:

I come before you, in other words, a deficit hawk to the core.  But it is the height of economic folly — and socially dangerous, in my view — to elevate deficit reduction as a goal today over boosting jobs and growth.  Especially when there are ways to goose the economy while at the same time legislating changes that move us toward fiscal sanity once we’re past this stagnation.

Mr. Miller presented a fantastic plan, which he described as “a radically centrist ‘Jobs Now, Deficits Soon’ package”.  He concluded the piece with this painfully realistic assessment:

The fact that nothing like this will happen, therefore, is both depressing and instructive.  Republicans are content to glide toward November slamming Democrats without offering answers of their own.  Democrats who now know the first stimulus was too puny feel they’ll be clobbered for trying more in the Tea Party era.

The leadership void brought to us by the Obama Presidency was the subject of yet another great essay by Paul Farrell of MarketWatch.  He supported his premise — that President Obama has capitulated to Wall Street’s “Conspiracy of Weasels” — with the perspectives of twelve different commentators.

The damage has already been done.  Any hope that our President will experience a sudden conversion to authentic populism is pure fantasy.  There will be no more federal efforts to resuscitate the job market, to facilitate the availability of credit to small businesses or to extend benefits to the unemployed.  The federal government’s only concern is to preserve the well-being of those five sacred Wall Street banks because if any single one failed – such an event would threaten our entire financial system.  Nothing else matters.