This Monday's NY Times ran a lead article raving about how optimism on the economy had headed up since President Obama's inauguration - something like his claim that the seas stopped their rise when he won the nomination. Absent a major international calamity, the economy will remain the overriding political issue through the next couple of elections, and the acolytes have the message - Bush created the problem, and Obama is solving it. Three perspectives:
1. The crisis in the banking system began in late 2007, and culminated with the bankruptcy of Lehman Brothers on September 15, 2008. The Bush administration obtained congressional approval for $700 billion to buy up mortgage related "toxic assets", and changed direction to inject hundreds of billions into partial ownership to save numerous banks and insurer AIG. Additional major bank failures were averted, and the rate of smaller bank failures has increased to six or seven per month out of a total of about 8000 in the country - within the FDIC's capacity to manage.
So what progress has the Obama administration and the Democratic Congress made? For one, they have demonstrated the undesirability of having Tim Geithner and Barney Frank as partners. Hank Paulson's March 2008 call for an overhaul of the regulatory systemhas been largely ignored, allowing the French to take the lead at the recent G20 conference. The focus has, instead, been on compensation issues, with Barney Frank calling for not only control of compensation for all employees in companies receiving federal money, but also government oversight of performance evaluation systems. Nancy Pelosi has favored punitive, retroactive taxation for AIG management. The government's pushing for more liberal mortgage restructuring, restrictive travel policies, and personnel decisions has caused a push toward repaying the TARP loans ASAP. Not surprisingly, interest in a "Public-Private Partnerships Investment Program" to buy up the toxic assets at the heart of the problem has been tepid at best, with constantly changing rules and vilification of Wall Street.
2. The real economy is getting better, as it works its way through the 16th month of an unusually long recession. At this point the data is mixed - housing may be approaching a bottom; the (leading indicator) stock market has turned up, with lower volatility; oil has stabilized around $50 per barrel; the balance of payments and personal savings rates have improved; the yield curve is getting back to more normal relationships; there are some corporate mergers and bond issues; and Wells Fargo has announced record earnings. On the other hand, unemployment (a lagging indicator) approaches 9%, and credit markets remain very tight. Spring is for the optimists.
Unfortunately for the politicians, little of this has anything to do with the $787 billion stimulus plan passed in February - which the European Unionpresident has called "a way to hell." True, the tax reduction made its way into paychecks quickly, but the real spending on infrastructure and the 8500 attached earmarks lies in the future. If anything, the credit belongs largely to the (theoretically non-political) Fed under the leadership of Bush-appointee Ben Bernanke, which has reduced interest rates to nothing and printed gobs of money. Most likely, the connection between cause and effect will be tenuous - but the politicians and the media will have their day.
Meanwhile, a few billion dollars has eased the way of General Motors and Chrysler toward bankruptcy, as they have been unable to strike the deals with the UAW and bondholders that Ford has. The $20 billion or so price tag has been high, but if a structured Chapter 11 can be managed, it may be worth it. (I differ from my more conservative friends in thinking that the importance of the automotive industry is so great that government money is necessary. That said, it is small businesses that create America's jobs, and there is little for them in all of the bail-out plans.)
3. The real long-term issue is that we have been living beyond our means, and Obama's solution is to have the government borrow more as it racks up trillion dollar annual deficits for the next decade. His $3.6 trillion budget, passed, but the vote was telling, with some 20 Democrats in the House and 2 in the Senate voting against it. Significantly, the "cap and trade" carbon tax did not receive enough support to indicate eventual passage, and the health care and eduction spending increases will be hard fought. As the recession works its way through, Democrats such as Evan Bayh of Indiana and Ben Nelson of Nebraska have chosen to be on the right side of financial integrity - and that will probably be a good place to be as Obama's inflation takes off.
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This week's YouTube is a tribute to that travel renegade - Southwest Airlines.
Bill Bowen - 4/10/09
Leaving aside comments on the premises and conclusions of this post (with many of which I disagree), just for the record, Ben Nelsen is Senator from Nebraska.
Posted by: Donald Scherl | April 11, 2009 at 05:11 AM