Krugman notes that the media played wide eyed zombies with the size of the Recovery Act. In effect making it much more difficult to make upward adjustments down the road, Behind the Curve
President Obama’s plan to stimulate the economy was “massive,” “giant,” “enormous.” So the American people were told, especially by TV news, during the run-up to the stimulus vote. Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.
Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.
To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.
Employment has already fallen more in this recession than in the 1981-82 slump, considered the worst since the Great Depression. As a result, Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It’s a credible promise — his economists used solidly mainstream estimates of the impacts of tax and spending policies. But 3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.
There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?
On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring.
“Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. To be sure, leaders are supposed to sound calm and in control. But in the face of the dismal data, this remark sounded out of touch.
And there was no hint in the interview of readiness to do more.
A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan, so it was good to hear that Mr. Obama spends at least an hour each day with his economic advisors, “talking through how we are approaching the financial markets.” But he went on to dismiss calls for decisive action as coming from “blogs” (actually, they’re coming from many other places, including at least one president of a Federal Reserve bank), and suggested that critics want to “nationalize all the banks” (something nobody is proposing).
As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery … well, you get the picture.
Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along?
Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed.
The broader public, by contrast, favors strong action. According to a recent Newsweek poll, a majority of voters supports the stimulus, and, more surprisingly, a plurality believes that additional spending will be necessary. But will that support still be there, say, six months from now?
Much of how to proceed centers on to nationalize AIG and the banks. The Fed probably wouldn’t completely nationalize them if things start, by circumstances to head that, they would straighten them out and probably break them up. Citibank is actually multiple banks anyway. Amazingly Richard Shelby (R-Al) wants to let them all fail – we can all take some pleasure in imagining the line of people in front of Shelby’s house – depositors and investors waiting for Dick to write them a check for the money they lost. Then the second line of the unemployed from the repercussions for the economy with banks falling like dominoes. Some are using the term receivership in place of nationalization, because it sounds less like socialism. At the end of the day nationalization and receivership would be the same thing. Its a national emergency and people are still playing word games from the seventies. An Amazingly Disingenuous Piece by Alan Blinder on Bank Nationalization
Before I start shredding “Nationalize? Hey, Not So Fast,” by Alan Blinder in the New York Times, let us first go back to the basic problem,, nomenclature. Blinder does not specifically do so in this article, but opponents to nationalization often raise the image of enterprises being expropriated by the state, in other words, healthy (or at least viable) businesses being stolen.
We have the reverse here. Instead a transfer of wealth from the private sector to the state, we have the state (as in the taxpayer) propping up businesses and keeping management demonstrated to be incompetent, perhaps corrupt (let us not forget that overcompensation in phony good times is tantamount to looting, and liberal accounting appears to be awfully common) in place.
The normal remedy for failed businesses is to let them fail. But we don’t do that with banks. The big fear is depositor runs, and if that were to occur on any scale, it would indeed bring the entire system down.
Blinder is to some extent taking the Obama administration line – they do not want to nationalize the banks. The problem is that since they continue to hemorrhage money – we have a weird de facto nationalization in which we have no control over assets or management salaries, plus we’re subsidizing shareholders. But unlike shareholders, tax payers now have a literal financial investment in the banks and have no expectation of returns, just a cross your fingers and hope they do not fail so the economy does not get worse, so said tax payers do not lose their jobs.
John Kay of the Financial Times, hardly a socialist, put it well:
Governments have attempted to impose the first element of nationalisation (ownership) without the second (ultimate control and accountability). But such a separation is neither desirable nor workable for long. The wrangling over Sir Fred Goodwin’s RBS pension is an immediate, if trivial, illustration of problems that arise when the government, in effect, owns an institution but maintains ambiguity about authority. So is the far more substantive issue of who implements lending obligations of publicly supported banks.
Vikram Pandit, Citigroup’s chief executive, poses the issue in stark terms. When the US government announced further support last week, he was reported as telling analysts: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.” But if I were a US taxpayer, I would ask why I had provided $45bn (€36bn, £32bn) to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution. I can think of no good answer. The US government has not given Citigroup $45bn because it thinks such support is a good financial investment. Most experience shows the situation of struggling banks gets worse much more often than it improves. The US government has given Citigroup $45bn because it fears, rightly, that its collapse would have devastating consequences for the US financial system.
President Obama and though they would rather drink ditch water then admit it, many Conservatives are hoping that the economy will magically get better and the up tick will save the banks. That seems unlikely at this point. We need to save the banks so the economy does not get worse. Receivership or nationalization might also save us from those disastrous headlines where banks receiving stimulus money from Bush’s original TARP are throwing parties, sponsoring golf tournaments and giving out huge bonuses. These are relatively small beans, but the money and the public impressions add up over time, making it even more difficult in political terms to go back to Congress which has a Republican party that is not just hoping the economy crumbles, but is doing what it can to push it in that direction. Would the Republican party actually push the country into disaster in a last ditch attempt to return to power. The last eight years answers that question.
The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad- hoc approach that leaves management in place and avoids necessary asset writedowns, a veteran Federal Reserve official said.
“We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions,” Kansas City Fed President Thomas Hoenig said in prepared remarks in Omaha, Nebraska. He called for a resolution process for firms deemed too big to fail, allowing their break-up if their complexity makes them unmanageable.
Hoenig’s comments are the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began. He joins a growing number of observers, from ex-Treasury Secretary James Baker to former Fed chief Alan Greenspan, to favor temporary government takeovers of financial firms hobbled by distressed mortgage assets.
Fed Chairman Ben S. Bernanke has endorsed the approaches taken by Treasury Secretary Timothy Geithner and his predecessor. The Treasury has spent most of its $700 billion financial stability fund on buying stakes in banks without taking management control.
Geithner has ordered a so-called stress test for the largest 19 U.S. banks to determine whether they need more capital, and told lawmakers that more congressionally approved funds may be needed. He has stressed that nationalization isn’t the goal.
Hoenig said while policy makers “understandably” want to avoid nationalizing banks, “we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”
President Obama has been less then enthusiastic about nationalization. There has been to date, though events seem to be changing that attitudede, some arguments against it. I don’t know that nationalization is the absolute answer, but it should be on the table for consideration. Maybe Obama is playing it safe. Waiting to see if public opinion swings toward a mandate or to see if simply pumping money into what is beginning to look like a bottomless pit, that nationalizing is the only viable option.
In an interview, Brooks said that Obama’s people respond quickly to columns with which they find fault — but that, in doing so, they refrain from “personal insults,” opting for a “very nice, very evidence-based” approach instead.
They printed what would have been my commentary in the story,
The Obama outreach effort is different than Bush’s in part because the previous administration “only reached out to people who automatically agreed with them.”
While conservative columnists were invited to the Bush White House, the Obama team has sat down with writers from across the ideological spectrum, among them syndicated columnist Charles Krauthammer, Weekly Standard editor Bill Kristol, The Wall Street Journal’s Gerald Seib, The National Journal’s Ron Brownstein, The Times’ Frank Rich and MSNBC’s Rachel Maddow.
President Obama is certainly aware of the political axiom that you cannot just make your point once. You have to repeat it a few times before the press lets it sink in and pass it along to readers.
Old Globe wallpaper IV. The old plane reminds me of the graphic they used in the first Indiana Jones movie.