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Has Obama''s Presidency Already Failed?

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tradergirl

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Looks like Geithner was not worth falling on his sword for.

Why Obama’s new Tarp will fail to rescue the banks
By Martin Wolf Financial Times

Published: February 10 2009 18:06 | Last updated: February 10 2009 18:06


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.





[email protected]
 

E B

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Has Obama''s Presidency Already Failed?

What do you think, tradergirl? I''m interested to hear your thoughts.
 

zhuzhu

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Date: 2/10/2009 7:12:11 PM
Author: EBree
Has Obama''s Presidency Already Failed?


What do you think, tradergirl? I''m interested to hear your thoughts.

!!!!!!!!!!!!!ROFL!!!!!!!!!!!!!!
 

luckystar112

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Apparently the article is too long, Trader. Any Dems want to repost this so that people actually answer?

lol

I think its a good question. I''m certainly not completely disappointed with Obama thus far, but some things have caused me to bat an eye.
 

Beacon

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I didn''t read all the article, but I think Obama et al better get back to what they campaigned on.

Where is all the "hope"? - I am hearing "disaster" and "catastrophe". I feel like I am back in Sept 08. Geithner is terrifying, and he looks scared to death. Poor kid.

The American people are being scared to death. We need encouragement to work through these problems.

When FDR came on in the depression people took so much hope in his wonderful radio speeches. He did not release any plans to fix the economy for 100 days after his election. But he did give hope and he smiled and he did not act like the roof was going to fall on our heads.
 

luckystar112

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Date: 2/10/2009 8:11:25 PM
Author: Beacon
I didn''t read all the article, but I think Obama et al better get back to what they campaigned on.

Where is all the ''hope''? - I am hearing ''disaster'' and ''catastrophe''. I feel like I am back in Sept 08. Geithner is terrifying, and he looks scared to death. Poor kid.

The American people are being scared to death. We need encouragement to work through these problems.

When FDR came on in the depression people took so much hope in his wonderful radio speeches. He did not release any plans to fix the economy for 100 days after his election. But he did give hope and he smiled and he did not act like the roof was going to fall on our heads.
Completely agree!
 

strmrdr

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not yet, but having to go on prime time national tv to scare 3 republicans into voting for his plan shows a very large lack of leadership ability.
Scary.
 

luckystar112

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Date: 2/10/2009 8:25:59 PM
Author: strmrdr
not yet, but having to go on prime time national tv and to scare 3 republicans into voting for his plan shows a very large lack of leadership ability.
Scary.
Two of the Republicans, Susan Collins and Olympia Snowe, are from Maine and I''m sure didn''t need too much nudging. They are def more moderate.
 

beebrisk

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Date: 2/10/2009 8:25:59 PM
Author: strmrdr
not yet, but having to go on prime time national tv and to scare 3 republicans into voting for his plan shows a very large lack of leadership ability.

Scary.
Clearly he''s already figured out that the "politics of fear" he rallied so hard against, actually gets stuff done!

Unfortunately, what''s getting done is a big, friggin'' mess!
 

strmrdr

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Date: 2/10/2009 8:34:48 PM
Author: luckystar112
Date: 2/10/2009 8:25:59 PM

Author: strmrdr

not yet, but having to go on prime time national tv and to scare 3 republicans into voting for his plan shows a very large lack of leadership ability.

Scary.
Two of the Republicans, Susan Collins and Olympia Snowe, are from Maine and I''m sure didn''t need too much nudging. They are def more moderate.
RINOs, they need to get some strong candidates to run against them in the primaries and knock them out of the senate.
 

Beacon

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They don''t seem to be able to focus on anything postive. And there are some postives. Interest rates are coming down, some companies have been able to borrow money and sell bonds. A company is actually going public tomorrow for the first time in many months.

Instead they look like deer in the headlights, especially Geithner, who I really hope we don''t have to see much on TV any more. He is the very worst speaker, gives no confidence. I was so annoyed today.
 

purrfectpear

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I realize that because of technology we''ve all become a nation of "want it now" and immediate gratification, but all partisan politics aside...doesn''t anyone get more than 30 days before people start saying you''ve failed?

Heck, I gave Bush 6 months and I didn''t even vote for him. We have replacement CEO''s of major corporations and we don''t wait a month and yell "you schmuck"
 

Dancing Fire

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Date: 2/10/2009 7:12:11 PM
Author: EBree
Has Obama''s Presidency Already Failed?

What do you think, tradergirl? I''m interested to hear your thoughts.
TG must be busy adding up her profits from shorting the stock market today.
 

AGBF

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"Has Obama's Presidency Already Failed?"


Perspective is so interesting. Bob Herbert today wrote that he is the great chess master, always several steps ahead of friend and foe alike.


The Chess Master


Deborah
 

iheartscience

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Date: 2/10/2009 9:01:06 PM
Author: Dancing Fire
Date: 2/10/2009 7:12:11 PM

Author: EBree

Has Obama''s Presidency Already Failed?

What do you think, tradergirl? I''m interested to hear your thoughts.
TG must be busy adding up her profits from shorting the stock market today.
HA! Shortest short that ever shorted...shorter.
 

E B

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Date: 2/10/2009 9:01:06 PM
Author: Dancing Fire
Date: 2/10/2009 7:12:11 PM

Author: EBree

Has Obama''s Presidency Already Failed?

What do you think, tradergirl? I''m interested to hear your thoughts.
TG must be busy adding up her profits from shorting the stock market today.
And I can''t wait to hear all about it.


I agree, purrfectpair.
 

beebrisk

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Date: 2/10/2009 8:59:07 PM
Author: purrfectpear
I realize that because of technology we''ve all become a nation of ''want it now'' and immediate gratification, but all partisan politics aside...doesn''t anyone get more than 30 days before people start saying you''ve failed?


Heck, I gave Bush 6 months and I didn''t even vote for him. We have replacement CEO''s of major corporations and we don''t wait a month and yell ''you schmuck''
And I wish our new president had given the Senate and the American people more than a couple of days to sort out this train wreck of a bill.
 

ksinger

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I read the piece and it is actually makes some good points...
 

LAJennifer

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Date: 2/10/2009 11:32:14 PM
Author: rob09
*YAWN*
Did you read it? Just wondering.
 

SarahLovesJS

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Date: 2/11/2009 6:29:55 AM
Author: ksinger
I read the piece and it is actually makes some good points...
I agree. I don''t think the article has an anti-Obama message at all, if anything they''re trying to assure that he succeeds. But looks like most don''t want to read it.
 

Madam Bijoux

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iwannaprettyone

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I read it.

I just think it is hillarious that so many people, intelligent people at that, think one person can save the world. NOT GONNA HAPPEN. All the planets have to align to get anything accomplished.

He will do the best he can. Has he already failed? I think the question is absurd, failed based on what...the media?


ETA: OH, and till someone realizes that printing more money without the actual collateral is a REALLY BAD idea, we will continue to dig this ditch.
 

sklingem

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Date: 2/11/2009 11:21:26 AM
Author: LAJennifer
Date: 2/10/2009 11:32:14 PM

Author: rob09

*YAWN*
Did you read it? Just wondering.
I actually did. Problem is that no article is going to solve philosophical differences in solving this crisis and that for every economist criticizing Obama''s approach there is going to be another one who supports the latter. Unfortunately only time will tell - and any reliance of what "experts" are saying with respect to the chances for success or failure is pretty fruitless IMHO. Thus *YAWN*. Maybe we can get a bit of partisan bickering out of it on this forum. Wish me happy birthday instead - it was yesterday!
R.
 

LAJennifer

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Date: 2/11/2009 1:49:21 PM
Author: rob09

Date: 2/11/2009 11:21:26 AM
Author: LAJennifer

Date: 2/10/2009 11:32:14 PM

Author: rob09

*YAWN*
Did you read it? Just wondering.
I actually did. Problem is that no article is going to solve philosophical differences in solving this crisis and that for every economist criticizing Obama''s approach there is going to be another one who supports the latter. Unfortunately only time will tell - and any reliance of what ''experts'' are saying with respect to the chances for success or failure is pretty fruitless IMHO. Thus *YAWN*. Maybe we can get a bit of partisan bickering out of it on this forum. Wish me happy birthday instead - it was yesterday!
R.
Happy Birthday.
 

Rank Amateur

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Date: 2/10/2009 9:05:32 PM
Author: AGBF

Perspective is so interesting. Bob Herbert today wrote that he is the great chess master, always several steps ahead of friend and foe alike.


The Chess Master
Wow. I''ve seen some pieces from the media fawning over BHO but this one is a doozy.

The perspective is that of a lap dog.
 

SarahLovesJS

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Date: 2/11/2009 1:42:49 PM
Author: iwannaprettyone
ETA: OH, and till someone realizes that printing more money without the actual collateral is a REALLY BAD idea, we will continue to dig this ditch.
Oh I will ditto you on that one big time.
 

AGBF

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Date:
2/11/2009 9:35:42 PM
Author: Rank Amateur

The perspective is that of a lap dog.
You're entitled to your opinion, R/A. Bob Herbert does criticize Obama when Obama sells out to the right wing, however, and it is for that vigilance that I value Mr. Herbert. He is, in my opinion, a great man.

Deborah
 
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