Has Barack Obama’s presidency already failed?

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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.

http://www.ft.com/cms/s/0/9ebea1b8-f794-11...?nclick_check=1

[Peikko 1,575]

Of course.

Next?

[I AM NOT THAT GUY 5,715]

So, once Obama signs the Stimulus Bill, the Dems will own the economy?

[crazyinEgypt 0]

um yeah

[Jasman0717 9]

Has Barack Obama's presidency already failed? In normal times, this would be a ludicrous question.

3 weeks....

[luckytxn 2,265]

You know we should give the guy a longer time frame to announce he is another Carter.

[NickD 203]

Can't turn on any talk or news show without getting expert opinions on what Obama should or should not do, just wonder why all these guys didn't run for president since they think they are so damned smart.

Even I have my own suggestion for Barrack that as president he can do, bring back the entire Bush administration under armed guard, turn them over and shake all the money they took out of their pockets. That should take care of most of the national debt.

[luckytxn 2,265]

Agree and then we can shake out the new incoming administration and pay off the rest of the debt from what they raked in during the gravy years.

[Dr. A ♥ O 203]

They say a pix is worth a thousand words.

The Partial Birth Abortion Ban Act of 2003

And the Lily Ledbetter Fair Pay Act of 2009:

[Jasman0717 9]

Was Bush bashed this badly in 2001?

[Waldo 0]

We were too busy crying to post on the web. 2009 and were still crying.

[I AM NOT THAT GUY 5,715]

Was Bush bashed this badly in 2001?

University Wire

02-02-2001

(Temple News) (U-WIRE) PHILADELPHIA -- George W. Bush has now been crowned the King of the United States ... strike that, sworn in as president of the United States of America. All the official vote counting and recounting, and recounting again (in Palm Beach) is done. Although the Republicans are ecstatic that their man is now in office, many are not.

The following are some funny Web sites that make fun of Dubya and a serious one too. GeorgeTheSecond.homestead.com has officially crowned George W. Bush the king of the United States. There are even superimposed pictures to prove it. The Web site had an ongoing contest to figure out what the initials ...

[DeadPoolX 9]

Was Bush bashed this badly in 2001?

I'm not sure. I think the media (and the public) were still obsessing over "hanging chads."

[spookyturtle 9,466]

Imagine that, Obama has already failed 3 weeks into his term of service. What will we do for the next 3 years and 49 weeks? Time for the Republicans to get Palin ready for 2012. They should start campaigning now.

[MMW 2]

The failure of President Obama, if you can fail in 3 short weeks, has been his inability to reign in his party in the Senate and Congress. I see his first weeks as a puppet show and Majority Leader Pelosi and others are pulling the strings. To be a president is to lead so he needs to lead and not worry at this point about support from the Democrats for his next term run. I didn't vote for him, but i have respect for the man, but have to say his leadership so far is less than commendable. I actually feel sorry for him because, not only did he inherit an economic disaster, but add to that the pressure of being the first African American President. He has more at stake than just the terrible economy. I would say to him "Mr. president, this is a historic time in America, calling for strong decisive leadership. Let go of party politics and lead this nation and world the same as you ran your campaign, by taking control yourself and not allowing anyone to screw it up for you. It was your key to victory, let it be your key to governing." ( Just my opinion)