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.
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