Comment: Harder Times
newyorker.com
by John Cassidy
The New Yorker
March 16, 2009
As an exercise in political symbolism, the release of the White House’s $3.6-trillion budget for 2010 was an important moment. President Obama, by putting some numbers behind his plans to reform health care, limit carbon emissions, and tackle rising inequality, confirmed his intention to lead the country in a new direction. Republican jibes that the budget was “socialist” should be treated with the respect they deserve, which is to say none: after a major rise in outlays this year, due to the stimulus package, federal spending as a share of the gross domestic product is projected to fall back to twenty-two per cent by 2013, which represents a rise of just one per cent over last year’s figure.
The problem with the budget isn’t its size or its underlying philosophy, which is one of pragmatic progressivism. The problem is that unless the deterioration of the economy stops, the Administration’s ambitious multiyear plans could end up being purely symbolic. Last week, businesses across the country were shedding workers and sales at frightening rates: General Motors sales are half what they were this time last year; sales at Saks have dropped by a quarter. On Wall Street, A.I.G. revealed new losses of more than sixty billion dollars, the Dow dipped toward 6,500, and Citigroup stock traded for less than a dollar a share. If you haven’t looked at your 401(k) statement lately, this is not the moment to get brave.
With some economists talking openly about a “depression,” the Administration needs to start rethinking elements of its recovery program, and the President himself needs to get more involved. By outsourcing the financial crisis to Lawrence Summers, the head of the National Economic Council, and Timothy Geithner, the Treasury Secretary—two clever but conventionally minded public officials who played significant (although inadvertent) roles in leading the economy to its present state—the President has closed off some options that should be considered, such as nationalizing insolvent banks, suspending payroll taxes, and offering everybody in the country a cheap mortgage. Such proposals would produce the usual protests, but the time for half measures has passed.
Before Obama took office, he and his team appeared to know what needed to be done. To break the recessionary dynamic, they suggested that they would pursue an integrated economic program consisting of a big stimulus bill, a meaningful effort to help struggling homeowners, a rescue package for the Detroit automakers, and an effective bank-stabilization plan; and in the final weeks of 2008 the Dow jumped nearly twenty per cent. According to the Congressional Budget Office’s latest analysis, the new spending and tax cuts in the $787-billion stimulus package, which Obama signed into law on February 17th, will boost the gross domestic product by about 2.6 per cent in 2009. That sounds encouraging, but in the last quarter of 2008 the G.D.P. fell at an annual rate of 6.2 per cent, and a similar downward lurch is expected in the current quarter. The stimulus alone, as it stands now, won’t be sufficient to counter that fall.
The foreclosure-prevention plan will cost $275 billion, but only $75 billion is directed at homeowners who are behind on their mortgage payments. The rest is going to shore up the finances of Fannie Mae and Freddie Mac, which the government took over last year. Refinancing is available for some people who are up to date on their payments and whose homes are still roughly worth their mortgages. But this rules out many in Florida, California, and Arizona whose homes have dropped in value by some forty per cent. The plan to save the auto industry remains a work in progress, as does the banking-industry restabilization, the importance of which can’t be exaggerated: Japan’s experience in the nineteen-nineties demonstrates that fiscal stimulus without effective financial stabilization doesn’t work.
The problem comes down to how to deal with the banks’ “toxic assets”—distressed mortgage bonds and mortgage-related derivatives, mostly—which have been festering on their balance sheets for nearly two years. Summers and Geithner favor letting the banks function on their own, pumping more money into them, and relieving them of their toxic assets. This is hard to do without rewarding shareholders and bank executives, overpaying for bad assets, and infuriating the public, but Geithner believes that he has found a way around these challenges. Under his proposal, the government will team up with hedge funds, buyout firms, and other Wall Street operators to buy the distressed mortgage assets. Meanwhile, about twenty big banks are being forced to undergo “stress tests,” to see if they need more capital.
This plan could work. However, it shares several features with the Bush Administration’s failed approach to dealing with the banks, which Geithner, in his former post as head of the New York Fed, helped to shape. It is incremental rather than definitive; it is opaque; it works with the financiers who caused the crisis; and it is based on the assumption that an economic recovery will begin next year. If the recession turns out to be deeper and longer than the Treasury is expecting, the banks will need even more government money.
Another option—which recently received the reluctant endorsements of even Alan Greenspan, James Baker, and Lindsey Graham—is temporary nationalization: the government takes over the most troubled banks, splits off their toxic assets, puts those assets in a publicly owned “bad bank,” and sells off the healthy parts of the businesses. After a ruinous boom-bust cycle in the late nineteen-eighties, some Scandinavian governments followed this approach. Within a couple of years, their economies were recovering strongly, and the Swedish government ended up making a profit. Here the strategy could punish irresponsible bankers (whose shares and options would be wiped out), avoid having to put a price on the toxic stuff, and enable the government to order the institutions under their control to make more loans.
Right now, for instance, the government could take temporary control of Citi and Bank of America, and, if necessary, give larger handouts to those banks that are deemed capable of surviving. A President with Obama’s communication skills and approval ratings should be able to market such steps to the public, especially if he were also to set up a 9/11-style commission to investigate what went wrong on Wall Street (an idea that shouldn’t be ruled out just because John McCain supported it) and to demand repayment of some of the bonuses given out to executives at firms like Citi and A.I.G.
Last week, Christina Romer, the head of the Council of Economic Advisers, expressed the hope that the Administration’s policies would lead to a “Rooseveltian moment,” by which she meant a sharp economic upturn, like the one that occurred from 1933 to 1937. Acting in a Rooseveltian manner involves defying orthodoxy, challenging powerful interests, and giving voice to the public’s disgust at the corrupt financial establishment. F.D.R. was called a lot worse names than socialist. He didn’t let it stop him. ? |
