Has Barack Obama’s presidency already failed?

[bwv 1080]

He gambled it on continuing Paulson's bailout program for the banks and chances are it was a losing bet and will break his presidency:

Why Obama's new Tarp will fail to rescue the banks
By Martin Wolf

Published: February 10 2009 18:06 | Last updated: February 10 2009 18:06
http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html?nclick_check=1

Has Barack Obama's presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday's sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years' economic crisis, has let Congress shape the outcome.

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this "progeny of the troubled asset relief programme" fails, Mr Obama's credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of "toxic assets" have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the "super-SIV (special investment vehicle)" proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a "no brainer".

The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.

If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new "good banks", leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new "bad banks", leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.

By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.

[Renfield]

"Is Mr Wolf jumping to conclusions?"

[Bulldog]

"Is Mr Wolf jumping to conclusions?"

Perhaps, but he's just one of many who seem to think they know how to solve the crisis.  If you put ten leading economists in one room, the likely result would be ten different solutions. 

[DavidRoss]

....it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

Although it's much too soon to judge his presidency, Obama's handling of this first major test sure looks as if he's abdicated leadership to President Pelosi.  President Obama, Congress, and the partisan press should all note that Obama was elected Chief Executive because of hope in his promise to bring fundamental change to Washington and to rise above partisan politics.  The enormous good will he enjoys is his personal political capital.  He must spend it wisely.  Unfortunately he seems to have forgotten that as much as Bush was despised, with only a 24% favorable rating according to the Zogby poll shortly before the election, the Democrat-controlled Congress was even more despised, with a record low 11% favorable rating in the same poll!  Having surrendered leadership to the Democrats in Congress on the economic recovery program, choosing instead to assume the role of salesman for Democrat special-interest politics as usual, Obama's actions thus far do not inspire confidence.

We're still waiting to see who the real President Obama turns out to be: the dynamic visionary who promised to end destructive partisanship and bring fundamental change to Washington's insider-special-interest-business-as-usual politics?  Or the junior back-bencher who can be trusted to go along with his Party's Congressional agenda as shown by his voting record in the Senate?  It may be too much to ask for courageous leadership from a young man with no experience running anything with real consequences.  But ask we must, lest this fateful opportunity be lost.  The stakes are too high--and not just for Mr. Obama's political career, but for us all, including the whole world.  We need a true statesman in the Oval Office, not just a glib salesman.  Let us pray he can rise to the challenge.

Edit:  Silly typo corrected and slightly confusing phrasing adjusted to improve comprehension.

[Bulldog]

We're still waiting to see who the real President Obama turns out to be: the dynamic visionary who promised to end destructive partisanship and bring fundamental change to Washington's insider-special-interest-business-as-usual politics?  Or the junior back-bencher who can be trusted to go along with his Party's Congressional agenda as shown by his voting record in the Senate?  

I think Obama is somewhere in the middle of the spectrum.  Actually, I see him as more of a pragmatist than anything else.  In one area I definitely agree with David - Obama needs to be very careful in his dealings with Pelosi.  She's as partisan as they come, and Obama needs to rise above her.  If not, she will throw him under the bus without blinking an eye.

I'm also concerned with Obama's Secretary of the Treasury.  Although he's been hailed as "uniquely qualified" for the position, he is unique only in his ability to appear comatose when questioned by Congress.  Overall, Obama's picks for the top positions in his administration have been less than inspiring. 

[ezodisy]

appointing a bunch of cheats and liars (like Geithner) hasn't done him any good -- it makes it look like David's "President Pelosi" comment is quite acccurate. It reminds me of the football chant, "YOU DON'T KNOW WHAT YOU'RE DOING!!!!"

[DavidW]

This article is pretty silly, it's only relevant if one presumes that there will be no future legislation concerning the economy.  Obama has said multiple times that this is only the beginning, and the current stimulus package will not save the economy, it will only save it from getting worse.  And I think he made it clear that even buying the toxic assets will also not be the solution.  He himself pointed out that we need to stop being a nation of consumers and pay off the national debt.

And frankly any article that says that the presidency has already failed is obviously just stupid republican propaganda.  We have four years with this president, if we hear the cry of Wolf to often now, then in the future when republican pundits actually make a legitimate point, who will be listening?

This is just as bad as the dumb news reporters saying that he failed to break the partisan divide, when any reasonably intelligent person would realize that it's not going to be accomplished within a matter of weeks.

[Dr. Dread]

[drogulus]

     

     The problem with this bailout is timidity, a desire to split differences to get support from the tax cutters who don't think you should spend money in a stimulus plan (almost a clinical definition of insanity at this late date). So in addition to being in some ways (possibly) misdirected, it will almost inevitably be too small. Political solutions tend to be grab bags where conflicting rationales are submerged under a "try everything, but not too much" approach that legislators can come to agreement on. But the Repubs are not agreeing, they are positioning themselves for a calamitous failure, so why not be bold? Stop trying to appeal to a nonexistent bipartisanism. Obamas decent impulses aren't helping him here.

     

This article is pretty silly, it's only relevant if one presumes that there will be no future legislation concerning the economy.

      I wouldn't say silly, but you have a point. This is an improvisation, and critics are looking at weak points which may be shored up in the near future. And it's probably not true that only what happens now matters.

[DavidRoss]

You are mischaracterizing the differences between the Democrats' bill and the Republican and moderate opposition.  The latters' position is not, as you suggest, that spending should not be a part of the plan, but rather that the spending in a massive deficit-financed stimulus bill should all be targeted at stimulus, and that it is unconscionable and counter-productive to lard the bill up with tradition Democratic Party special interest group spending that will provide very little bang for the buck as stimulus.

[drogulus]

     Most of what we call pork (bridges that usually are to somewhere) is actually useful now. We should rebuild as much infrastructure as we can, with priority going to projects that can be started soon and can involve improved energy efficiency. So, we should build all those new schools we need, repair or rebuild bridges, increase subsidies for mass transit, etc. These are things that will boost the economy in the short term and the long term as well.

   

"Is Mr Wolf jumping to conclusions?"

    He's correct to identify the problem as he does, I think. In the end some form of quasi-nationalization may be where we go. The administration is simply reflecting the disagreements that are found on the editorial pages as well, and with the added problem (as Wolf says) that solutions are not for the problem we face but for a problem that the government can handle with the usual kind of consensus.

[DavidRoss]

Everyone supports infrastructure spending as appropriate, providing short term jobs creation with long term benefits that everyone agrees on.  The Senate's latest iteration of the bill has increased infrastructure spending from the House's original <$100 Billion to ~$150 Billion.  There's another ~$200 Billion in benefits payments and entitlements, most of which would be difficult to argue with.  Another ~$300 Billion in tax cuts, with the difference of opinion not so much over the virtue of tax cuts but rather how they should be targeted to be most effective.  That leaves ~$150 Billion in other appropriations and this, I believe, is the primary bone of contention.

Of course it will prove rather difficult for anyone--including the Members who are expected to vote on the bill next Monday--to examine all of the provisions contained in 1071 pages before the Monday vote.

Edit:  Ack--I just checked the news and learned that the House already passed the bill late today.  If I were spending my own money I'd probably at least want to read the contract and then sleep on it before making a commitment.  And my sense of honor would require even more conscientiousness if I were spending other people's money.  Guess that's why I'm not in Congress!

[greg]

Either way, my future is screwed.

[Renfield]

Either way, my future is screwed.

There's generation X optimism right there!

[springrite]

Either way, my future is screwed.

Well, you can always live in the past 

[greg]

Well, you can always live in the past 

My past isn't that good at all, either... actually, for me, it completely sucked.
See my new imaginary blog. The only solution is to create a pretend life. 

[drogulus]

       What are the chances "it" will work, at least well enough to slowly lift us into a shitty recovery that lasts years?

       I say about 90% positive,

       because my standards are low in an emergency and

       The "it" that we end up with will have mutated away from what we have now. Contrary to what some may believe, we don't have to solve this by next week.

       So I'm still optimistic in a way, though it's a pretty grim optimism. 

[flyingdutchman]

Your future was screwed the day George Bush became President, lied to us about Iraq, and then mortgaged everyone's future on a totally bogus war.

[Jay F]

Your future was screwed the day George Bush became President, lied to us about Iraq, and then mortgaged everyone's future on a totally bogus war.

I don't understand why we're not hearing this message from the Democrats now, hammering it into everyone's consciousness the way the Republicans say the same things overandoverandoverandover. All it would take is "We've just lived through eight years of tax cuts and war, and look where those failed policies have gotten us." Democrats just don't have the hate in them, or something.

[ezodisy]

I don't understand why we're not hearing this message from the Democrats now, hammering it into everyone's consciousness the way the Republicans say the same things overandoverandoverandover. All it would take is "We've just lived through eight years of tax cuts and war, and look where those failed policies have gotten us." Democrats just don't have the hate in them, or something.

his whole presidency is based on getting rid of the old hate-hate stuff, remember?