What Obama Must Do To Have Any Hope of Fixing the Economy

I voted for Obama.

I passionately want him to succeed in solving the economic crisis.

But before he can succeed, there is something he has to do.

Paul Krugman wrote an article yesterday hinting at the answer:

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions….

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly …. Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) …

Officials still aren’t willing to face the facts.

Geithner will never be willing to face the facts. Bernanke will never change his views. never change his discredited perspective. Similarly, Larry Summers, the head of Obama’s National Economic Council – the most powerful economic advisor on Obama’s team – will never change his ways.

They are too wedded to an overly-leveraged, highly-securitized, derivatives-based, bubble-blown financial system. They are too entrenched in outdated economic theories.

Democrats assume that Summers is a tried-and-true veteran, a big wheel during Clinton’s presidency, when the economy was booming. But that was before the things which Summers championed – unregulated derivatives, increased leverage, and repealing Glass-Steagal (the New Deal legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming “too big to fail”) – had any effect. Now that the fuse he lit has exploded, it should be obvious that he is part of the problem, not part of the solution.

Unless Obama replaces Geithner, Bernanke and Summers with people who get it, and who are willing to fix the things that really need fixing, Rush Limbaugh will get his wish: Obama will fail.

If Bernanke cannot be replaced in the middle of his term, he should at least be sidelined.

This entry was posted in Uncategorized. Bookmark the permalink.
  • The market has already priced the junk. The price is zero. Citibank closed at $1.02 , and AIG worth 1 Billion. We’ve poured 180 billion into AIG. Till we stop doing this nonsense no effect will be seen. The derivative boys changed the law and get paid first in a bankruptcy. Seems to me they are holding stuff worth nothing according to the market.

  • The problem is our interest bearing currency. All money and credit should be created by the federal government. The FED should be bought by the US government. There should be no governmeny debt and hence no interest on the debt.We should also begin to properly audit federal spending. We could save 4 billion dollars a week. The NY FED is the official depository of the US Treasury and all those billions of dollars stolen each week by Wall Street went through the FED before it went missing.Bernanke, Summers Rubin, Geithnerand Hank Paulson all belong in Jail,

  • GeorgeGreat week of blog posts….I check in daily.you stopped by for a visit to my blog today….thought you might want to see….http://4best4worst.wordpress.com/keep up the great workMaximus

  • Why Obama? Become proactive, place trust in the trustworthy, surely this crisis is because we have put our trust blindly in governments, corporations and credit agencies that were incompetent and had dubious morality. If we, the people, use some discretion in our choice of business and social relations we will empower sound managers. Who didnt recognise a perfect storm coming, through inherent conflicts of interest and rorting rottenness? Only those who were besotted with the media spin, the veils of delays while the insiders were plundering? JPMorgan made 5Billion on derivatives last quarter, let alone the personal bets that precursed these. They have inside information, right up to the fed. It is understandable that the common man has trusted his superannuation and retirement to Wall Street for the whole last century but its not understandable that they would do so in future. Nor any other country with their savings. We are only just now beginning to pay the piper for the Bush, Blair, Howard years of “wealth creation”.Obama has put in all the old guard as you say, the whole two party system hasnt come up with the goods.There is immense need to raise the taxes on profits made during this “CRUNCH” to 90%, to begin to fairly cover the common trusting man, who as taxpayer is paying for these bailout funds.But if we do not learn discretion, personal carefulness as to giving trust, then the crisis will be seeded to grow again and again.

  • Who should replace them ? This economic cycle started with Reagan, broadly speaking, and ended in 2007. A great swath of economists, the one’s who got promoted for following the ‘party line’ , are pretty much discredited.

  • AX

    Mark’s commentary is on point. Geithner was head of the NY Fed during all of this, that tells you all you need to know about his selection. The new plan to piss our taxes away by backing hedge funds is the most egregious to date.

  • I certainly would have fired them. How can the people who broke it fix it. Do you suppose Obama put them there because they know “where the “bodies are buried”?

  • Van

    Great job. I read your blog every day.