Obama Responds

I've been giving President Obama and his team a hard time on this blog and I'm certainly not alone. To give the guy credit where credit is due, however, I must acknowledge his recent speech explaining the origins of the crisis and the efforts now being made to deal with it. In my opinion, this is an articulate, intelligent, thorough and honest presentation, the sort of thing we rarely get from politicians anymore. For an excellent assessment, interleaved with the original speech, I'll direct you to an article published yesterday at the Clusterstock blog, by Henry Blodget. Some excerpts from both the speech and Blodget's interleaved commentary (which appears in brackets):

Now, I don’t agree with some of the ways the TARP program was managed, but I do agree with the broader rationale that we must provide banks with the capital and the confidence necessary to start lending again. That is the purpose of the stress tests that will soon tell us how much additional capital will be needed to support lending at our largest banks [NO, THEY WON'T. WHY NOT? BECAUSE THE STRESS TESTS AREN'T STRESSFUL ENOUGH. THE UNEMPLOYMENT RATE IS ALREADY HIGHER THAN THE PEAK RATE ASSUMED IN THE STRESS TEST BASELINE SCENARIO]. Ideally, these needs will be met by private investors. But where this is not possible, and banks require substantial additional resources from the government, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.

Of course, there are some who argue that the government should stand back and simply let these banks fail – especially since in many cases it was their bad decisions that helped create the crisis in the first place. But whether we like it or not, history has repeatedly shown that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months – years of low growth, low job creation, and low investment that cost those nations far more than a course of bold, upfront action. And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – “where’s our bailout?,” they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. [NO ONE IS ARGUING THAT THE GOVT SHOULD JUST "STAND BACK AND SIMPLY LET THE BANKS FAIL"--LIKE LEHMAN. WHAT THE NATIONALIZATION CROWD WANTS IS CONTROLLED RESTRUCTURING AND REPRIVATIZATION.]

I'll interject a comment of my own here, because it's not clear at all to me that "a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses." I'm pleased to see Obama offer an explanation that accounts for his strategy, something we've all been awaiting for some time. However, as I understand it, that dollar from the bank can be stretched to eight or ten only because 1. the bank is able to obtain low interest loans stemming ultimately from the Federal Reserve; and 2. if the borrower defaults, the Federal Reserve and the government generally are there to back up the bank with taxpayer money. In other words, it's only due to a system designed to provide maximum leverage to the banks, the investors, the speculators, and the gamblers, at taxpayer expense, that the capitalist "free market" system can operate at all. And when we recall that it was excess leverage that produced both the first great depression and this one, then we cannot but question the wisdom behind the plan to rescue this old, antiquated and extremely dangerous system, a system that ultimately, when all the smoke and mirrors are removed, amounts to nothing less than socialized capitalism for the benefit of a small group of privileged insiders. Here's a bit more:

So let me be clear – the reason we have not taken this step [nationalization] has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess. [YES, SHAREHOLDERS HAVE PAID A PRICE, BUT NOT BONDHOLDERS. THEY'VE BEEN 100% PROTECTED] Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. [STRONGLY DISAGREE WITH BOTH ARGUMENTS. FORCING BANKS TO WRITE DOWN THE BAD ASSETS AND THEN RESTRUCTURING THEM WOULD DEAL WITH THE PROBLEM QUICKLY AND FOR ALL TIME...AS OPPOSED TO THE CURRENT SOLUTION, WHICH DRAGS IT OUT. IF THE GOVT WOULD CONSIDER MAKING BONDHOLDERS PAY FOR THE WRITE-DOWNS, MEANWHILE, THE TAXPAYER WOULDN'T LOSE MUCH OF ANYTHING.]

On this issue I disagree with both Obama and Blodget, because as I see it each is seeing only one part of the elephant, neither is seeing the crisis as a whole. The reality is that the current meltdown is far deeper and more disastrous than anything we've encountered in the past, to the point that neither Obama's plan to shore up the banks nor the alternative of nationalization and restructuring can possibly work. Nevertheless, we must give Obama credit for bravely attempting to come to terms with the problem in a proactive manner. I think it may be too much to expect him to move in the direction I personally would like to see, because what I see looming, for better or worse, is a planned economy based on distribution of resources rather than the reorgainization of a bankrupt financial system. And since a planned economy would 1. have to be run by "big government" and 2. be tantamount to socialism, or at least one type of socialism, it would be political suicide for him to advocate it at this time. It's only after his efforts to prop up the old system have tumbled down to the ground utterly, completely and unquestionably will it be possible to consider what I regard as the only workable alternative.
One last quote from Obama's remarkable speech:

We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity – a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad.

It’s a foundation built upon five pillars that will grow our economy and make this new century another American century: new rules for Wall Street that will reward drive and innovation; new investments in education that will make our workforce more skilled and competitive; new investments in renewable energy and technology that will create new jobs and industries; new investments in health care that will cut costs for families and businesses; and new savings in our federal budget that will bring down the debt for future generations. That is the new foundation we must build. That must be our future – and my Administration’s policies are designed to achieve that future.

Obama's vision is so carefully thought through and so admirable that I must admit I'd really like to see it work, for him, for the country, and for the world. Maybe I'm wrong, hopefully he's right. Let's leave it at that, for now.