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Barack Oblivious

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As I’ve been discussing here for quite a while, commentators from across the political spectrum have been busy criticizing the job performance of President Obama.  The mood of most critics seems to have progressed from disappointment to shock.  The situation eventually reached the point where, regardless of what one thought about the job Obama was doing – at least the President could provide us with a good speech.  That changed on Monday, August 8 – when Obama delivered his infamous “debt downgrade” speech – in the wake of the controversial decision by Standard and Poor’s to lower America’s credit rating from AAA to AA+.  This reaction from Joe Nocera of The New York Times was among the more restrained:

When did President Obama become such a lousy speech-maker?  His remarks on Monday afternoon, aimed at calming the markets, were flat and uninspired — as they have consistently been throughout the debt ceiling crisis.  “No matter what some agency may say,” he said, ”we’ve always been and always will be a triple-A country.”  Is that really the best he could do?  The markets, realizing he had little or nothing to offer, continued their swoon.  What is particularly frustrating is that the president seems to have so little to say on the subject of job creation, which should be his most pressing concern.

Actually, President Obama should have been concerned about job creation back in January of 2009.  For some reason, this President had been pushing ahead with his own agenda, while oblivious to the concerns of America’s middle class.  His focus on what eventually became an enfeebled healthcare bill caused him to ignore this country’s most serious problem:  unemployment.  Our economy is 70% consumer-driven.  Because the twenty-five million Americans who lost their jobs since the inception of the financial crisis have remained unemployed — goods aren’t being sold.  This hurts manufacturers, retailers and shipping companies.  With twenty-five million Americans persistently unemployed, the tax base is diminished – meaning that there is less money available to pay down America’s debt.  The people Barry Ritholtz calls the “deficit chicken hawks” (politicians who oppose any government spending programs which don’t benefit their own constituents) refuse to allow the federal government to get involved in short-term “job creation”.  This “savings” depletes taxable revenue and increases government debt.  President Obama — the master debater from Harvard – has refused to challenge the “deficit chicken hawks” to debate the need for any sort of short-term jobs program.

Bond guru Bill Gross of PIMCO recently lamented this administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

Back in July of 2009 – five months after the economic stimulus bill was passed – I pointed out how many prominent economists – including at least one of Obama’s closest advisors, had been emphasizing that the stimulus was inadequate and that we could eventually face a double-dip recession:

A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

Economist Brad DeLong recently provided us with a little background on the thinking that had been taking place within the President’s inner circle during 2009:

In the late spring of 2009, Barack Obama had five economic policy principals: Tim Geithner, who thought Obama had done enough to boost demand and needed to turn to long-run deficit reduction; Ben Bernanke, who thought that the Fed had done enough to boost demand and that the administration needed to turn to deficit reduction; Peter Orszag, who thought the administration needed to turn to deficit reduction immediately and could also use that process to pass (small) further stimulus; Larry Summers, who thought that long-run deficit reduction could wait until the recovery was well-established and that the administration needed to push for more demand stimulus; and Christina Romer, who thought that long-run deficit reduction should wait until the recovery was well-established and that the administration needed to push for much more demand stimulus.

Now Romer, Summers, and Orszag are gone.  Their successors – Goolsbee, Sperling, and Lew – are extraordinary capable civil servants but are not nearly as loud policy voices and lack the substantive issue knowledge of their predecessors.  The two who are left, Geithner and Bernanke, are the two who did not see the world as it was in mid-2009.  And they do not seem to have recalibrated their beliefs about how the world works – they still think that they were right in mid-2009, or should have been right, or something.

I fear that they still do not see the situation as it really is.

And I do not see anyone in the American government serving as a counterbalance.

Meanwhile, the dreaded “double-dip” recession is nearly at hand.  Professor DeLong recently posted a chart on his blog, depicting daily Treasury real yield curve rates under the heading, “Treasury Real Interest Rates Now Negative Out to Ten Years…”  He added this comment:

If this isn’t a market prediction of a double-dip and a lost decade (or more), I don’t know what would be.  At least Hoover was undertaking interventions in financial markets–and not just blathering about how cutting spending was the way to call the Confidence Fairy…

President Obama has been oblivious to our nation’s true economic predicament since 2009.  Even if there were any Hope that his attentiveness to this matter might Change – at this point, it’s probably too late.


 

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There WILL Be Another Financial Crisis

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The latest Quarterly Report from SIGTARP – the Special Inspector General for the Troubled Asset Relief Program (Neil Barofsky) – was released on January 26, 2011.  The report brought a mix of good and bad news.  Among the good news was this tidbit:

Where fraud has managed to slip in, SIGTARP’s Investigations Division has already produced outstanding results in bringing to justice those who have sought to profit criminally from TARP, with 45 individuals charged civilly or criminally with fraud, of whom 13 have been criminally convicted. SIGTARP’s investigative efforts have helped prevent $555.2 million in taxpayer funds from being lost to fraud.  And with 142 ongoing investigations (including 64 into executives at financial institutions that applied for and/or received TARP funding through TARP’s Capital Purchase Program [“CPP”]), much more remains to be done.

Much of the bad news from SIGTARP stems from the never-ending problem of “moral hazard” resulting from the perpetually-increasing growth of those financial institutions, which have been “too big to fail” for too long:

In short, the continued existence of institutions that are “too big to fail” — an undeniable byproduct of former Secretary Paulson and Secretary Geithner’s use of TARP to assure the markets that during a time of crisis that they would not let such institutions fail — is a recipe for disaster.  These institutions and their leaders are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts, and bailouts.

Worse yet, as Mr. Barofsky pointed out in a January 25 interview with the Center for Public Integrity, the system has been rigged to provide additional advantages to the TBTF banks, making it impossible for smaller institutions to compete with them:

Noting that the major financial institutions are 20 percent larger than they were before the financial crisis, Barofsky said that the financial markets simply don’t believe that the government will allow one of these biggest banks to collapse, regardless of what they say will happen.  Those big banks enjoy access to cheaper credit than smaller institutions, based on that implicit government guarantee, he said.

As evidence, he cited the ratings agency Standard & Poor’s, which recently announced its intention to add the prospect of government support into its calculation when determining a bank’s credit rating.

At 1:35 into the video clip of the Center for Public Integrity’s interview with Mr. Barofsky, he explained:

There’s going to be another financial crisis.  Of course, there is.

He went on to point out that once the next crisis begins, we will have the option of implementing the mechanisms established by the Dodd-Frank bill for breaking up insolvent banks.  The question then becomes:  Will be break up those banks or bail them out?  Barofsky suspects that the market is anticipating another round of bailouts.  He noted that “there’s a question of whether there will be the political will as well as the regulatory will to do that”.  As he pointed out on page 11 of the latest SIGTARP Quarterly Report:

As long as the relevant actors (executives, ratings agencies, creditors and counterparties) believe there will be a bailout, the problems of “too big to fail” will almost certainly persist.

Let’s not forget that most dangerous among those problems is the encouraged and facilitated “risky behavior” by those institutions, which will bring about the next financial crisis.  This is the “Doomsday Cycle” problem discussed by Mr. Barofsky.  “The Doomsday Cycle” was the subject of a paper, written last year by economists Simon Johnson and Peter Boone.

The SIGTARP Report then focused on what has been discussed as TARP’s biggest failure:

As SIGTARP discussed in its October 2010 Quarterly Report, after two years, TARP’s Main Street goals of “increas[ing] lending,” and “promot[ing] jobs and economic growth” had been largely unmet, but it is TARP’s failure to realize its most specific Main Street goal, “preserving homeownership,” that has had perhaps the most devastating consequences.  Treasury’s central foreclosure prevention effort designed to address that goal — the Home Affordable Modification Program (“HAMP”) — has been beset by problems from the outset and, despite frequent retooling, continues to fall dramatically short of any meaningful standard of success.  Indeed, even the “good news” of falling estimates for TARP’s cost is driven in part by the ineffectiveness of HAMP and related programs, which provide for TARP-funded grants and incentives.

As we begin fighting over the Final Report of the Financial Crisis Inquiry Commission (FCIC) — which investigated the causes of the financial crisis — it is important to be mindful of Neil Barofsky’s admonition that there will be another financial crisis.  If our government fails to prosecute the malfeasance that caused the crisis itself, that neglect — combined with the enhanced size of those “too big to fail” banks — could create a disaster we would have to characterize as “TBFAB” – Too Big For A Bailout.  What will happen at that point?


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