Jason Linkins has a rather concise piece on HuffPo right now which pretty much sums up my sentiments--the effort's focused upon Wall Street and not Main Street--about what's wrong with our government's current efforts to tackle the economy: "
What Obama Said Last Night That Really Was Controversial."
What Obama Said Last Night That Really Was Controversial]
Jason Linkins
Huffington Post
10/20/09 10:12 AM
So, while everyone was losing their minds at President Barack Obama's ill-advised "Special Olympics" quip, here's an interesting part of the interview that seems to have gone unremarked upon, by and large:
From the show's transcript:
LENO: Well, when will the money -- this money was given out to the banks. I would have thought by this time it would have sort of trickled down to Main Street, to people wanting to get loans -- I mean, it all went out there months and months ago. Where is it?
OBAMA: Well, what's happening is a lot of these banks are keeping it in the bank because their balance sheets had gotten so bad that they decided, you know what, for us to stay solvent we need to maintain certain capital ratios; we've got to have a certain amount of capital in the bank -- and they haven't started lending it yet. And that's why what we've got to do -- right now what we're doing is essentially doing a diagnostic test -- trying to use some auto language here so you -- (laughter) -- we're doing a diagnostic on each of the banks, figuring out what are their capital levels? Can they sustain lending? And then I think we're going to separate out -- those banks that are in good shape, we're going to say to them, all right, you're on your own; go start lending again. Those banks that still have problems, we'll do a little more intervention to try to clean some of those toxic assets off their books.
But I actually have confidence that we'll get that done. In the meantime, we're taking a lot of steps to, for example, opening up -- open up separate credit lines outside of banks for small businesses so that they can get credit -- because there are a lot of small businesses out here who are just barely hanging on. Their credit lines are starting to be cut. We're trying to set up a securitized market for student loans and auto loans outside of the banking system. So there are other ways of getting credit flowing again.
And, back to Linkins' narrative:
So let me get this straight. We have here broad acknowledgment that the first bank intervention didn't work because the banks used the money to bolster their capital ratios instead of lending the money out, which was the whole point of the intervention in the first place. Additionally, we have Obama talking about the need to "set up a securitized market... outside of the banking system" in order to "get credit flowing again," and establish the very lending that the bank intervention was supposed to have achieved. Isn't this an indictment, plain and simple, of TARP? And yet, after these "diagnostic tests," we may yet end up doing "a little more" TARP-style "intervention?"
This looks to me like we'll be pursuing both an admittedly unsuccessful policy AND a stopgap policy to mitigate the former policy's lack of success, simultaneously.
This isn't good...and the reason it sucks may be summed up in two rec'd diaries from yesterday...
1.) There may very well not be much money left over, once we're done focusing upon Wall Street at the brutal expense of Main Street, without us subjecting ourselves to even more severe consequences, per gjohnsit's diary from yesterday: "U.N.: It's time for the world to ditch the dollar."
...we don't have a non-dysfunctional monetary system. We have a very dysfunctional one that requires the American consumer to keep buying things he doesn't need with money he doesn't have. Without our wasteful consumption of their goods our foreign creditors have neither the means nor the reason to keep buying our debt...
...And rather than ending with a whimper, Bretton Woods 2 may end with a bang.
The federal government is trying to offset the drop in economic activity with increased borrowing and spending. However, that just puts more strain on the system because a) it doesn't do much to restore the falling trade deficit, thus not putting many new dollars in the hands of our foreign creditors, while at the same time b) it requires much more borrowing from our foreign creditors.
Where will our foreign creditors get the money to loan us if they don't have significant trade surpluses? If they don't loan us the money, where will the federal government get the cash to fund stimulus packages?
As gjohnsit reminds us, the only place left for us to get money if nobody else will buy our debt is to print it, ourselves. At that point, inflation takes over...perhaps very intense inflation.
2.) The overall philosophy being invoked here by Geithner, NBBooks reminds us, is one of epic fail:
"The Economy: 'No Return to Normal' - Galbraith."
Galbraith notes that "What did not recover, under Roosevelt, was the private banking system." It was only after the industrial mobilization of World War Two forced an actual halt to the production of consumer goods, creating a massive reservoir of pent-up demand. This, coupled with war-bond induced family savings that rebuilt household spending power during the war, is what was unleashed once the war was over. Thus, Galbraith notes "the relaunching of private finance took twenty years, and the war besides."
A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
That being so, what must now be done? The first thing we need, in the wake of the recovery bill, is more recovery bills. The next efforts should be larger, reflecting the true scale of the emergency. There should be open-ended support for state and local governments, public utilities, transit authorities, public hospitals, schools, and universities for the duration, and generous support for public capital investment in the short and long term. To the extent possible, all the resources being released from the private residential and commercial construction industries should be absorbed into public building projects. There should be comprehensive foreclosure relief, through a moratorium followed by restructuring or by conversion-to-rental, except in cases of speculative investment and borrower fraud. The president's foreclosure-prevention plan is a useful step to relieve mortgage burdens on at-risk households, but it will not stop the downward spiral of home prices and correct the chronic oversupply of housing that is the cause of that.
Third, we will soon need a jobs program to put the unemployed to work quickly. Infrastructure spending can help, but major building projects can take years to gear up, and they can, for the most part, provide jobs only for those who have the requisite skills. So the federal government should sponsor projects that employ people to do what they do best, including art, letters, drama, dance, music, scientific research, teaching, conservation, and the nonprofit sector, including community organizing--why not?
--SNIP--
Finally, there is the big problem: How to recapitalize the household sector? How to restore the security and prosperity they've lost? How to build the productive economy for the next generation? Is there anything today that we might do that can compare with the transformation of World War II? Almost surely, there is not: World War II doubled production in five years.
Today the largest problems we face are energy security and climate change--massive issues because energy underpins everything we do, and because climate change threatens the survival of civilization. And here, obviously, we need a comprehensive national effort. Such a thing, if done right, combining planning and markets, could add 5 or even 10 percent of GDP to net investment. That's not the scale of wartime mobilization. But it probably could return the country to full employment and keep it there, for years.
--SNIP--
We did it before, and we can, and must, do it again.
In summation: Pouring money into banks is the exact opposite of what's needed now. But, that's where the money's primarily focused as it's being allocated by our government; and, that's per Geithner's, Bernanke's...and, now, even President Obama's words.
What's going to happen when we turnaround and start re-addressing the needs of Main Street via a second or third stimulus? Apparently, a "wait and see" approach is all Mr. Geithner and Mr. Bernanke have to offer.
Why aren't we addressing all of Main Street's needs first? Let's "wait and see" on those five, six, or seven trillion we're already determined to spend on Wall Street...on a banking sector that, even when "pushed," refuses to provide liquidity into the marketplace, based upon their actions to date.
End of diary.
End of story.
P.S.: For clarification purposes, I want to be clear that I'm still a big supporter of President Obama and his administration, in general. And, realistically, without 60 like-minded folks in the Senate, we have to implement stimuli in bits and pieces. But, we're now at a tipping point in terms of world opinion about the U.S.' financial stability. And, the world's opinion (regardless of realities), are what drives the market for foreign investors to purchase our debt, among other factors. I'm asking the question: Do we continue down this path without insuring the well-being of Main Street first? My answer is: No.