Reading Obama’s Balance Sheet
article.nationalreview.com
If one were to judge by the market alone, one would be forced to conclude that President Obama’s economic team has gotten off to a wretched start. Stocks have tumbled throughout the week, plunging most precipitously on Tuesday as Treasury Secretary Timothy Geithner announced his plan to save the banking system—or, rather, announced that he has a plan, but declined to describe it in any detail. But we don’t need to read the market tea leaves to know that Obama is on the wrong track—a simple analysis of his actions this week yields the same conclusion.
The week began with a Senate vote that cleared the way for a stimulus package that almost no one outside Congress believes to be the proper size or to contain the best mix of programs. It will add nearly a trillion dollars to the deficit, and most of the spending will kick in after the recession is over—too late to have any stimulative effect, but just in time to ignite inflation and to crowd out private investment in the recovering economy.
On Tuesday morning, Geithner unveiled his much-anticipated plan to restore stability to the nation’s troubled banking system. Geithner announced new financial commitments on the order of $2 trillion, but his plan lacked specifics. In rough outline it resembles the old approach, which has thus far failed to quell the crisis. Geithner proposed stress-testing banks and injecting capital into the system where it is needed. Does that mean directing more capital toward healthy banks? Propping up moribund banks? Geithner didn’t say.
Geithner also proposed $100 billion in new spending on foreclosure-prevention programs. How would these efforts succeed where others, such as last summer’s HOPE for Homeowners program, have failed? How would the administration deal with the stubborn reality that 30 to 40 percent of loan modifications end in foreclosure, regardless of the renegotiation? Again, Geithner was mum.
But most puzzling of all was Geithner’s call for a public-private partnership to buy toxic assets from troubled financial institutions. How would that work, exactly? Geithner said that the administration was “exploring a range of different structures,” and that it would start by putting in $500 billion of public money and “expand it based on what works”—by how much, in addition to that first half a trillion dollars, Geithner didn’t say. By the end of the day, the market had lost 300 points.
On Wednesday, the House Financial Services Committee hauled in the CEOs of the banks that cashed in on the $700 billion bailout and excoriated them for not lending the money quickly enough for congressional tastes. The elephant in the room was the fact that several of these banks are already insolvent—they’re dead, but they don’t know it yet. The committee demonstrated that its priorities are exactly backwards: It should be much more concerned about the possibility that these zombie banks are gambling on resurrection by making risky bets with taxpayers’ money.
The market’s verdict seems to be in: It is a vote of no-confidence in Obama’s economic agenda. Obama inherited difficult circumstances, to be sure. But he has responded with a bloated stimulus package that has something for every interest group, and a bank-rescue plan that hedges on the tough decisions. He needs to recognize that his stock is tanking. Less than a month into his presidency, a course correction already is needed. |
