[R-G] [BillTottenWeblog] Obama has picked the wrong hero for our times

[Bill Totten]

In order to save the global economy, the President has to stop trying to
satisfy everybody. He should follow the example of Roosevelt and leave
Lincoln behind

by Will Hutton

The Observer (February 15 2009)


Obama's America is a fractious, apprehensive country. There may be a
freshly elected administration but, despite the new leader's vaunting
rhetoric appealing to unity and reflecting the evident concern of
ordinary Americans, the political and financial elite are reluctant to
rally to a common cause. The ideological divides that have racked the US
remain as entrenched as ever. Obama may be a champion of the importance
of government, but he and the Democrats have a long battle to convert a
political victory into an intellectual one. Yet almost every block in
New York, like everywhere else in the US, has shops closing down as
visible evidence of an ever deepening recession - and the need for
wholesale change in the way the US is economically governed.

Last week should have been triumphant. The president won congressional
agreement for his record near $800 billion economic stimulus package,
which, despite all the horse-trading, still contains enough worthwhile
"shovel ready" infrastructure, energy and environmental spending to give
the US economy a much-needed boost. Meanwhile, treasury secretary Tim
Geithner signalled his intent to trigger up to $2.5 trillion in public
and private spending to restore the US financial system to health -
unfortunately he knew not how. This was the Big Beasts mobilising
resources on a mega scale. In British terms, it was as if Alistair
Darling had found GBP 90 billion on top of already record borrowing to
boost the economy - and more than GBP 200 billion to address the British
financial crisis.

Yet neither was received well, in part because the Obama team is ill
adept at getting beyond the slogans - such as the need to create 3.5
million jobs - and explaining how and why. They need to. The familiar
arguments in Britain about the prudence of huge borrowing are replayed
here with even more passion. Fiscal conservatism is a creed adopted with
religious fervour; a Washington conservative prayer breakfast is never
complete without devotees invoking God to curb public spending, lower
taxes and eliminate borrowing. Even the normally sane John McCain called
the package "generational theft".

On the face of it, the numbers are scary; a budget deficit, including
the spending on the banks, that will approach fourteen per cent of GDP
in 2009/10. Such is the result of a toxic combination: Bush's outrageous
legacy; the breaking of banks; and the need for the government to spend
when the American consumer, unnerved by a collapsed property market and
spreading gloom, is not. To build a bridge from here to where the US
needs to be requires economic daring and a bold belief in the future.
Obama is good - and he showed just what a formidable force he is when he
took to the road to sell his economic package. But what is beginning to
look doubtful is whether he can build around him a buttressing team who
share the same passion and capacity as President Roosevelt had in
similar economic circumstances. Obama has no equivalent of Roosevelt's
two key lieutenants, Harry Hopkins, who led the fight for work, or Jesse
Jones, who took on rebuilding the financial system.

Instead he is resolutely following his hero Abraham Lincoln, trying
vainly to build a cabinet of all the talents. Apparently he gives every
new cabinet member Doris Kearns Goodwin's biography of Lincoln, Team of
Rivals (2005). But Lincoln had a majestic moral cause - the abolition of
slavery - before which even political rivals buried their differences.
There is a great cause now, but for conservatives, the moral threat of
Big Government exceeds even that of capitalism. Obama has to challenge
them rather than charm them. And he needs some can-do allies. An
indicator of the dangers he runs came last week when a Republican
nominee he had named for commerce secretary, Senator Judd Gregg,
captured the headlines when he suddenly withdrew his nomination. Gregg
explained that he could not work alongside colleagues committed to
spending, tax cuts and consequential borrowing that he considered
entirely wrong.

It is this incapacity to trump the voodoo belief systems that have laid
the US and world so low that is so dismaying and dispiriting. We are
living through nothing less than the disintegration of the global
financial system, shattering the western banking systems' capacity to
lend. The risk is growing of a worldwide debt deflation. The west's
governments have no choice but to put their balance sheets behind their
broken banks and to make good the consumer demand that is no longer
there via fiscal policy. They may even collectively have to print money,
much more effectively done together than separately. Yet conservatives
deny these truths.

The acute problem is that, although the old order and ideas do not work,
there is no consensus on what the new order and ideas will be. The lack
of coherence is plaguing these early weeks of Obama's drive for economic
recovery. Thus Geithner's disappointing speech last Tuesday setting out
the next steps in his financial recovery programme, and then
stone-walling the senate budget committee the following day. The
administration wants to act decisively along the same lines as Sweden in
the early 1990s in putting its banking system back on its feet. But it
hesitates to nationalise banks as Sweden did. And it hesitates to commit
what could be fourteen per cent of American GDP in creating a "bad bank"
to take over crippling toxic debt as the Swedes did. It wants the same
ends, but cheaper - an intellectual challenge too far.

Geithner's solution is to enlist the private sector but even in
partnership with the government, the trouble is that there is no way any
scheme can buy bad loans and toxic assets for any one bank without
negotiating their price. The resulting valuation will become a benchmark
for all banks, and thus reveal the potential total losses for the
overall system. These are stunning. The IMF says they could be $2.2
trillion; New York University's Professor Nouriel Roubini, whose
forecasts of the extent of the crisis have proved accurate so far, last
week released figures suggesting that, assuming another twenty per cent
fall in house prices, the number could be as high $3.5 trillion. He
declared that the "US banking system is effectively insolvent".

But when the property market recovers, the losses will recede. In Sweden
the government's "bad bank" recovered almost all the losses as the
economy improved. The same would happen in the US. To get on that
virtuous circle the banks have to start lending again - but they won't
and can't when they are engulfed with bad debts. The government has got
to bite the bullet and either insure up to $3.5 trillion of bad debt; or
establish a "bad bank" to hold it; or some combination of both. And it
will need to supply extra capital to banks that are particularly
stricken. Whatever it does, the cost is much more expensive than the
$150 billion left over from the $700 billion "Tarp" bank rescue plan
established by George Bush and former US treasury secretary Hank Paulson
in the autumn. Yet going back to congress to ask for more money on this
scale is a political nightmare. Bankers are public enemy Number One.

American bankers, like their British counterparts, have been slow to get
the message. The closure of the markets on which their business model
depended is seen as an unpredictable act of God rather than the
consequence of their abuse. And the argument that they need to pay high
bonuses to retain talent is rightly mocked. What talent? The news that
Merrill Lynch paid $1 billion in bonuses despite record losses and a
taxpayer bail-out has inflamed public opinion.

Buried in the 1,000-page recovery plan are measures to limit bonuses to
one third of base pay, which, with the proposed $500,000 salary cap, is
a swingeing assault on bank remuneration.

Bankers are in no position to complain. Their avarice and the scale of
their business misjudgment have vastly complicated the politics of a
bank bail-out, which will have to be on a stupefying scale to be
effective. The open question is whether the US can afford to create a
"bad bank" or equivalent that might cost up to fourteen per cent of GDP,
on top of a budget deficit already of that same size. The answer is that
it cannot afford not to do it. Otherwise it might suffer the same fate
as Japan in the 1990s, whose refusal to accept the size of the problem
meant that it temporised with half measures - and suffered a decade of
economic stagnation.

This should have been the number-one agenda item on the G7 meeting of
finance ministers in Rome this weekend. Geithner could have flown in
with a coherent plan, rallied support for it and urged other countries
to follow his lead. He has not and cannot. Nor will he meet other
finance ministers who have worked up rescue models. Instead everyone is
doing their own thing, typified by the British. We launched our asset
protection scheme in January with no prior consultation with other
governments. It is not a bad scheme, but unless governments act in
concert they have no hope of success. Britain's once deep and broad
money markets were the result of global capital inflows. They cannot be
restored by the British government alone.

Yet the G7 is a cacophony of different plans and preoccupations.
Everybody, including Gordon Brown, is looking for legitimation for
short-term political advantage. It needs the Obama administration to cut
through the cackle and impose an agenda equal to the scale of what needs
to be done at home and abroad.

That inability is the gravest source of concern. There are signs that
the Obama team is getting the message; it backed off the worst
protectionist excesses in the Stimulus Bill, and both Obama and Geithner
say we need decisive, large-scale action. The worry is that they will
make too many concessions to the ideas and people who got us into this
mess. Lincoln was a great man. But it is a Roosevelt America that the
world needs now.

http://www.guardian.co.uk/commentisfree/2009/feb/15/us-economic-policy


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