Tuesday, March 03, 2009

Reviewing Obama's Budget

No, I have not had time to read the budget. Between making a living and turning 49 last week, I had other things to do. I could not even get to posting about the articles below. So I am giving you another of my omnibus posts. But I do want to make one comment that is keeps coming to mind.

I keep thinking about all those who say government needs to act more businesslike which leads me to this thought/comment: you got to spend money to make money.

"White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap. While Obama predicts the deficit would fall to $533 billion by the end of his first term, it would quickly begin to rise again and the national debt would remain elevated throughout the next decade."

"The risk to Obama's ambitions is likely to arise less from the defeated Republicans than from the victorious Democrats, who have all too many ideas of their own about what should be done in energy, health care and education.

And the other risk is in what he barely mentioned Tuesday: the rest of the world. Obama has just ordered 17,000 more troops to Afghanistan, a country with a stumbling government and a shaky neighbor in Pakistan, and a place where the United States is still searching for a plausible strategy.
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The world provides no respite for an American president, especially one already as burdened as this one.

When we elected Obama, we didn't know what a gambler we were getting."
E. J. Dionne Jr. - Obama's Pitch for Faith in Government - washingtonpost.com: "
In just over a month in office, the president has pursued two goals that, conventionally speaking, seem at odds. Again and again, he has reached out to conservatives and Republicans with White House invitations and promises to incorporate their best ideas in his own plans. Yet at the same time, he has sought, subtly but unmistakably, to alter the nation's political assumptions, its attitudes toward collective action and its view of government. Obama's rhetoric is soothing and his approach is inclusive. But he is proposing nothing less than an ideological transformation.

Tuesday night's speech was the most comprehensive manifesto he has offered yet for his new rendezvous with America's progressive tradition. 'We will rebuild,' he declared, 'we will recover, and the United States of America will emerge stronger than before.' If he is right, he will also have rebuilt American liberalism."

From The Nation comes Too Big Not to Fail?:
"But something seems to be missing. During FDR's first few months in office, and well into his second term, he received an overwhelmingly positive response not only from the public at large but also from the stock market, despite the fact that FDR and Wall Street generally detested each other.

In contrast, the reaction of global stock markets and market analysts to Obama's flurry of policy initiatives has been overwhelmingly negative. In the past week alone, since the passage of the stimulus, the announcement of the Geithner plan and the president's new plan for mortgage relief, the stock market has declined more than 10 percent. Indeed, the country's largest banks and auto companies, which were supposed to be the beneficiaries of much of these new programs, are on the brink of bankruptcy."

So what's the problem? Actually there are several problems. The first, as I noted in part one of this series, "The Pseudo Stimulus," there really is much less to Obama's stimulus than meets the eye and far less than will be needed to head off the dramatic increase in unemployment that is fast approaching.

For reasons of political convenience and a desire to move quickly, Obama and his advisors decided to appease a handful of key Republican senators, rather than seize the bully pulpit and rally support around a larger, more direct spending package with more debt relief for homeowners.

Ultimately Obama succeeded in getting just three "moderate" Republican senators and zero House Republicans to support the package. (Eleven House Democrats also voted against it.) These votes were costly. The final bill ended up slashing almost $40 billion from the package, while boosting the share of tax cuts to nearly 40 percent--including almost half of all relief provided in the critical first year when it is essential to get the downturn under control.


***

The first is that while nationalizing top-tier global banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, it is still viscerally opposed by most members of the power elite in New York and Washington--including most of his former club members.

The second is that by now, most American taxpayers have simply had it with huge Wall Street bailouts, supine members of Congress, overpaid banker chutzpadiks and high-handed Treasury secretaries. If they were ever asked, there is no way in Naraka that taxpayers would ever approve yet another open-ended injection of public capital into banks--especially one costing three times the entire "stimulus" and three-and-a-half times TARP I.

So the trick is to not ask them. With bank stocks sinking every day, the credit crunch hampering recovery and high expectations about policy changes, Geithner had to say something. But not too much. The whole subtext of his vague announcement was to finesse the question of precisely where all the money would come from. The hope was that this would buy time to line up private capital, perhaps by negotiating some kind of insurance subsidy that would induce it to participate. The hope was that this would do enough to stem the decline in bank stock prices and redirect attention away from the new "N"-word--nationalization.

***

That's all well and good at the micro level, but at the level of the overall economy, we badly need banks to swallow hard and start churning out new loans--and not just to gold-plated borrowers who don't really need the money. Since TARP I funds were not dedicated to new lending, and, indeed, since policy makers like Paulson, Bernanke and (presumably) Geithner decided to leave TARP I's use entirely up to the banks' discretion, this period of extreme largesse and low interest rates has also coincided with tight credit markets--except for well-off corporations and elite borrowers and refinancers, who have actually been the main beneficiaries of Bernanke's low-interest rate policy.

So while both the Federal Reserve and the Treasury have been busy demonstrating that they have finally taken the lessons of the Great Depression to heart, and have been setting records for generosity and loose lending, at the end of the day they still allowed the private banking system to keep its elephant in the hallway, blocking the road to recovery.

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