Saturday, February 28, 2009

Obama's Weekly Address

From The White House Blog:
Keeping Promises

In the Weekly Address this morning, President Obama explains how the budget he sent to Congress will fulfill the promises he made as a candidate. On fiscal responsibility, a fair tax code, a clean energy economy, real health care reform, and education, this budget sets out a new vision for our country.

But having put his priorities on paper and having stood behind them, the President recognizes that there are those who will fight against change every step of the way.

Two years ago, we set out on a journey to change the way that Washington works.

We sought a government that served not the interests of powerful lobbyists or the wealthiest few, but the middle-class Americans I met every day in every community along the campaign trail – responsible men and women who are working harder than ever, worrying about their jobs, and struggling to raise their families. In so many town halls and backyards, they spoke of their hopes for a government that finally confronts the challenges that their families face every day; a government that treats their tax dollars as responsibly as they treat their own hard-earned paychecks.

That is the change I promised as a candidate for president. It is the change the American people voted for in November. And it is the change represented by the budget I sent to Congress this week.

During the campaign, I promised a fair and balanced tax code that would cut taxes for 95% of working Americans, roll back the tax breaks for those making over $250,000 a year, and end the tax breaks for corporations that ship our jobs overseas. This budget does that.

I promised an economy run on clean, renewable energy that will create new American jobs, new American industries, and free us from the dangerous grip of foreign oil. This budget puts us on that path, through a market-based cap on carbon pollution that will make renewable energy the profitable kind of energy; through investments in wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient American cars and American trucks.

I promised to bring down the crushing cost of health care – a cost that bankrupts one American every thirty seconds, forces small businesses to close their doors, and saddles our government with more debt. This budget keeps that promise, with a historic commitment to reform that will lead to lower costs and quality, affordable health care for every American.

I promised an education system that will prepare every American to compete, so Americans can win in a global economy. This budget will help us meet that goal, with new incentives for teacher performance and pathways for advancement; new tax credits that will make college more affordable for all who want to go; and new support to ensure that those who do go finish their degree.

This budget also reflects the stark reality of what we’ve inherited – a trillion dollar deficit, a financial crisis, and a costly recession. Given this reality, we’ll have to be more vigilant than ever in eliminating the programs we don’t need in order to make room for the investments we do need. I promised to do this by going through the federal budget page by page, and line by line. That is a process we have already begun, and I am pleased to say that we’ve already identified two trillion dollars worth of deficit-reductions over the next decade. We’ve also restored a sense of honesty and transparency to our budget, which is why this one accounts for spending that was hidden or left out under the old rules.

I realize that passing this budget won’t be easy. Because it represents real and dramatic change, it also represents a threat to the status quo in Washington. I know that the insurance industry won’t like the idea that they’ll have to bid competitively to continue offering Medicare coverage, but that’s how we’ll help preserve and protect Medicare and lower health care costs for American families. I know that banks and big student lenders won’t like the idea that we’re ending their huge taxpayer subsidies, but that’s how we’ll save taxpayers nearly $50 billion and make college more affordable. I know that oil and gas companies won’t like us ending nearly $30 billion in tax breaks, but that’s how we’ll help fund a renewable energy economy that will create new jobs and new industries. In other words, I know these steps won’t sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they’re gearing up for a fight as we speak. My message to them is this:
So am I.

The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I don’t. I work for the American people. I didn’t come here to do the same thing we’ve been doing or to take small steps forward, I came to provide the sweeping change that this country demanded when it went to the polls in November. That is the change this budget starts to make, and that is the change I’ll be fighting for in the weeks ahead – change that will grow our economy, expand our middle-class, and keep the American Dream alive for all those men and women who have believed in this journey from the day it began.
Thanks for listening.

Friday, February 27, 2009

Obama sets out firm deadlines on Iraq

Today President Obama traveled to Marine Corps base Camp Lejeune in North Carolina to announce his strategy for Iraq. President Obama said today that "This strategy is grounded in a clear and achievable goal shared by the Iraqi people and the American people: an Iraq that is sovereign, stable, and self-reliant."

President Obama's strategy is to remove all combat troops from Iraq in 18 months, while leaving as many as 50,000 troops there in non-combat roles until the end of 2011. Now I was a lowly non-com in the Marines, so I don't claim to be some great strategy, but I do not get the 50,000 troops being left behind. The missions that get described when people are defending leaving 50,000 soldiers and Marines in Iraq, do not require that many soldiers.

The mission that gets described would only require 10,000 U.S. personnel with air support mostly coming from bases in neigboring countries.

During his speech, President Obama declared that:
"To achieve that goal [to remove combat troops from Iraq], we will work to promote an Iraqi government that is just, representative, and accountable, and that provides neither support nor safe-haven to terrorists. We will help Iraq build new ties of trade and commerce with the world. And we will forge a partnership with the people and government of Iraq that contributes to the peace and security of the region."

President Obama does seem to understand the quandaries that remain in Iraq. In today's speech he frankly described many of the challenges:
"Iraq is not yet secure, and there will be difficult days ahead. Violence will continue to be a part of life in Iraq. Too many fundamental political questions about Iraq’s future remain unresolved. Too many Iraqis are still displaced or destitute. Declining oil revenues will put an added strain on a government that has had difficulty delivering basic services. Not all of Iraq’s neighbors are contributing to its security. Some are working at times to undermine it. And even as Iraq’s government is on a surer footing, it is not yet a full partner – politically and economically – in the region, or with the international community."

President Obama also emphasized that the problems in Iraq will not be solved through military means. He stated that:
"critical recognition that the long-term solution in Iraq must be political – not military....The long-term success of the Iraqi nation will depend upon decisions made by Iraq’s leaders and the fortitude of the Iraqi people. Iraq is a sovereign country with legitimate institutions; America cannot – and should not – take their place."

Still he set an almost impossible goal when he declared that they will leave Iraq with Iraqi a "government that is just, representative, and accountable."

Watch President Obama speaking at Camp Lejeune:

David Gregory had an initial take on MSNBC with retired General McCaffrey and retired Colonel Jacobs. The NBC reporter of course is a tool who has no idea what he is talking about when he speaks about the surge. Washington Post reporter Tom Ricks has a really good take on the situation. You can watch it here:

Here is another take on the plan from NBC:

Fourth Quarter GDP Figures Have Been Revised

To all those who have tried to suggest the economic problems of this country are not that bad (I'm looking at you Republicans) and that there were even signs of recovery at the end of Bush's administration, the news today is not good.

Highlighting that this nation is facing a major crisis, the fourth quarter GDP figures have been revised.

In Revision, G.D.P. Shrank at 6.2% Rate at the End of 2008, by Catherein Rampell, New York Times: The economy at the end of last year contracted at a far faster rate than initially estimated... With the exception of government spending, every major component of the economy shrank.

Output fell 6.2 percent at an annualized rate in the fourth quarter of 2008, revised downward from a previous estimate of a 3.8 percent decline.

The economy took the biggest hits in exports, retail sales, equipment and software, and residential fixed investment.

The downward revisions, though, came primarily because of a larger-than-anticipated contraction in inventories of unsold goods. ... Some hail the decline in inventories as potentially good news.

“The only plus to take out of this is that inventories weren’t as high, and that implies you don’t have to cut as much this quarter to get them back under control,” Mr. Gault said. He added that inventories were still too high, and he expected companies to further scale back their production, especially in response to the dismal consumer spending numbers.

Households also saved much more of their paychecks than initially estimated.

Professor Krugman comments in his blog

Minus 6.2%: Yikes.

And if the data on new unemployment claims are any indication (which they are), the economy is continuing to plunge at least as fast.

As Brad DeLong says, I think we’re going to need a bigger stimulus.

This will be a surprise for some, but it just confirms what most people thought was happening.

Should The US Consider Nationalizing Banks That Are In Trouble

Professor Nouriel Roubini of Global EconoMonitor, who is also known as Dr. Doom (because he for years was warning of the on-coming financial crisis) has given several interviews over the lasy week to Business New Europe, Charlie Rose, Wall Street Journal, Bloomberg, Reuters, ABC, NBR and CNBC.

In his CNBC interview, he strongly advocates a Swedish-style bank nationalization to repair the ailing financial system and prevent banks from turning into 'zombie banks' like were in Japan.

"If you don't nationalize them on a temporary basis the fiscal commitments will be bigger. The alternative is actually a dangerous debt spiral.”
The Swedish-style bank nationalization is where the government of Sweden in 1992 had to deal with the collapse of a real estate bubble and had to take control of two of that country's largest banks, Nordbanken and Gota. The government stripped the banks of their bad assets, which it kept in a pair of new companies known as "bad banks." The remnant "good banks" were then merged into a single company and launched back into the marketplace.

Even Conservatives like Alan Greenspan and Senator Graham have publicly suggested that the idea of nationalization may be needed. Professor Roubini has pointed to this in a number of interviews like the one he had with Tunku Varadarajan in Wall Street Journal.

The biggest barrier to nationalization is the negative public image as 'Bolshevik' rather than 'pragmatic.' But this is stupid, and the result of idiots like Hannerty, Limbaugh, and Republican politicians who toss out accusations of socialism and communism without consideration. Nationalizing troubled banks would allow the government to take distressed assets without having to set a price.

For those who are scared of the word 'nationalization' you should consider the example of IndyMac, a bank that was nationalized and quickly re-privatized in less than a year. IndyMac was an example of a company that needed to be seized.

During a discussion of the banking crisis on ABC's This Week with George Stephonopilis that featured Professor Roubini, Professor Paul Krugman and George Will, and they discussed a temporary nationalization. Professor Krugman suggested calling nationalization “pre-privatization” to sugarcoat the program. Krugman also points out that in 2009 we have already nationalized 14 banks. Similarily the Federal government took control of mortgage finance companies Fannie Mae and Freddie Mac in early September of 2008.

Administration officials say they are determined to maintain the appearance, and in important respects the reality, that banks remain under private ownership. I do not agree with this, the current leadership of these banks are the major problem. The Obama administration argues that they have a responsibility to pursue the least costly solution, and that they continue to believe smaller steps than nationalization can resolve the crisis. They are wrong.

Another argument against nationilzation is that the U.S. Banking system is larger than Swedens, and while the problem is spread across many of the nation's 8,300 banks, the bulk of the problem is in a concentrated few. Fix these mega banks like Citi and Bank of America and you have taken the largest concentration of troubled assets. Nationalize these mega banks, and break them up, no bank should ever be 'too big to fail.'

No one is arguing that the banks should be nationalized on a permanent basis. Those who are arguing against that are attacking straw men.

Obama and his economic team need to step-up as leaders and whether they call it Nationalization or not (it will most probably be called receivership or conservatorship) and take over those major banks that have dragged the economy down.

Another Reason To Get The Pitchforks

The other day Cenk Uyger of the Young Turks explained in the "Memebers Only" portion of the show how the top 5 Wall Street Finanacial Institutions lost 25.3 Billion Dollars and then gave out 25 Billion Dollars in bonuses.

Get that the companies lost 25.3 Billion and in the same year they paid 25 Billion in bonuses. If they cut the bonues, they would not have lost any money.

Now we are just talking bonuses here, this is not their full compensation. They would have been paid, they would just not have received their bonuses, and considering the job they had done, no bonuses should have been paid.

If you are not a member of the Young Turks, I would recommend joining so you can have access to the "Memebers Only" portion of the show.

World Stocks Lower as Economic Fears Remain

President Obama's plan to reform America's costly health care system is supposedly the cause of another bad day in the financial markets. Supposedly concerns about banks and pharmaceutical companies, whose profits may be curbed by President Obama caused investors to sell. I don't believe it.

I believe people are using Obama as an excuse to cover their want to sell assets and get what profit they can.

European markets fell today with Britain's FTSE 100 plunged 2 percent to 3,834.89, Germany's DAX lost 2 percent to 3,863.96, and France's CAC 40 dropped 1.5 percent to 2,702.89. This was lead by Lloyds Banking Group, which fell 20%. In total European bank stocks as a collective are down 25 percent since the beginning of the year.

In Asia, stock markets were mixed. Trade was listless after a bruising, volatile month that saw the region's export-driven economies sank deeper into recession amid collapsing demand and their currencies wither.

Ever Closer To a World Wide Depression

I was just passing through a room that had CNN on, and the report out of Japan was not good.

Sony is sacking its President CEO, and is turning to their head of British operations. Japanese Car companies are reporting that sails are down 40%, and while unemployment remains the same, they are reporting this is due to people giving up on looking for jobs, rather than any stabilization.

This financial crisis is not ending any time soon, and the problem is worse than most understand.

Thursday, February 26, 2009

$634 billion for health care in Obama's budget

In his speech Tuesday night, President Barack Obama said he was serious about fixing the health care crisis in this country. The budget that was released today show's that President Obama is very serious about health care. Very serious:

President Obama is proposing to begin a vast expansion of the U.S. health-care system by creating a $634 billion reserve fund over the next decade, launching an overhaul that most experts project will ultimately cost at least $1 trillion.The "reserve fund" in the budget proposal being released today is Obama's attempt to demonstrate how the country could extend health insurance to millions more Americans and at the same time begin to control escalating medical bills that threaten the solvency of families, businesses and the government.

Obama aims to make a "very substantial down payment" toward universal coverage by trimming tax breaks for the wealthy and squeezing payments to insurers, hospitals, doctors and drug manufacturers, a senior administration official said yesterday.

Embedded in the budget figures are key policy changes that the administration argues would improve the quality of care and bring much-needed efficiency to a health system that costs $2.3 trillion a year.

By first identifying a large pot of money to underwrite health-care reform -- before laying out a proposal on who would be covered or how -- Obama hopes to draw Congress to the bargaining table to tackle the details of a comprehensive plan. The strategy is largely intended to avoid the mistakes of the Clinton administration, which crafted an extensive proposal in secret for many months before delivering the finished product to lawmakers, who quickly rejected it.

I'm impressed by the strategy -- and the number.

Obama forecasts $1.75 trillion deficit this year

Today President Barack Obama and his administration have predicted a deficit of $1.75 trillion in a budget proposal for 2009. This is the legacy of President Bush, a $1,075,000,000 deficit. This gaping hole in the treasury is huge! This deficit represents 12.3% of U.S. GDP (gross domestic product), and is the largest percentage share of GDP since the end of World War II.

The President's budget sets some major goals such as overhauling the healthcare system and shoring up the U.S. economy.

Now senior Obama administration officials are suggesting that the President's expensive policy goals will be offset by cuts in spending on existing programs that are no longer necessary or have proven wasteful. The Obama administration is promising to put the country in better fiscal shape.

This is going to be difficult to near impossible as federal spending is skyrocketing as Obama officials try to jolt the faltering economy with public-works spending and tax cuts and continue to bail out the troubled financial industry. Still President Obama has made a bold pledge to halve the more-than $1 trillion deficit he inherited from former Republican President George W. Bush in four years.

To do this Obama is producing tax increases on wealthier Americans and reduce the cost of the Iraq war as a troop drawdown, to curb the deficit. Currently the budget projects costs of fighting in Iraq and Afghanistan as totaling just over $140 billion this year and $130 billion in the 2010 fiscal year. Obama's budget proposes that annual costs will drop after the drawdown to $50 billion annually. The proposed budget would also phase out government payments to crop producers making more than $500,000 -- saving $9.8 billion over 10 years -- and eliminate subsidies for cotton storage, saving an additional $570 million over the same period.

Playing Symantics

Yesterday Fed Chairman Ben Bernanke had this to say about nationalizing banks:
"Nationalization, to my mind, is when government seizes the banks, zeros out the shareholders and begins to manage and run the bank, and we don't plan anything like that."

Some our saying this is proof that the Obama administration is not considering nationalizing some of the major banks which are on the verge of collapse. I however take from this that the Obama administration will be taking control of these banks, but calling it a different name.

Wednesday, February 25, 2009

Bobby Jindal Swings and Misses

After President Obama's speech last night, the Republicans as the loyal opposition gave their rebuttal. They asked Louisiana Govenor Bobby Jindal to give this response, and to be honest I was interested in what he would have to say. Govenor Jindal is seen as an up-and-coming leader of the party, he has put him self out there as an opponent of the stimulus package. I wanted to see what the opposition had to offer. I was not impressed. The Governor called Obama's economic plans "irresponsible" in his response speech, but offered no real evidence of this, and offered nothing new in the way of ideas. His speech was immediately panned as poorly-delivered.

Even the Fox News panelists, who are always the GOPs’ biggest cheer leaders panned the Governor's response:

BRIT HUME: “The speech read a lot better than it sounded. This was not Bobby Jindal’s greatest oratorical moment.”

NINA EASTON: “The delivery was not exactly terrific.”

CHARLES KRAUTHAMMER: “Jindal didn’t have a chance. He follows Obama, who in making speeches, is in a league of his own. He’s in a Reagan-esque league. … [Jindal] tried the best he could.”

JUAN WILLIAMS: “It came off as amateurish, and even the tempo in which he spoke was sing-songy. He was telling stories that seemed very simplistic and almost childish.”

Still I think Rachel Maddow had the best rebuttal to the Governor's response. Rachel while discussing with Keith Olbermann and Chris Matthews expressed her disbelief that the GOP response to President Barack Obama’s address to Congress referenced Hurricane Katrina, and it left her speechless.

Watch it here:

LibertyAir Blog

Obama's first "State of the Union Speech"

Last nights speech was awesome! Last night's speech was a reminder about why we as a nation elected Barack Obama to be President of the United States. We as a nation need a real president, and I believe President Obama again showed he is up to the challenge. I know this was not technically the State of the Union speech, but it was.

President Obama set the tone for what he intends to do, while listing the challenges ahead:
“Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down.”
This speech was well crafted and expertly delivered. The speech was not overly wonkish, but it was really well delivered. In fact the speech sounded better than it read. The President helped explain why huge resources must go into creating a baseline of solvency for the system and a commitment to renewed lending and down the road growth. The speech and how Obama delivered it really set the right tone. Instant public surveys on Barack Obama's speech showed that generally speaking the public was incredibly receptive to his speech, regardless of political party.

A CBS News poll of approximately 500 people saw approval of the president rise from 62% before the speech to 69% afterward. A CNN poll showed 68% of respondents viewed the speech positively, 24% somewhat positively, and only 8% not positively. 82% supported the president's economic plan as outlined in the speech, while 17% opposed it.

As with every President, Obama did try to rally the nation by extolling the extraordinary character of the American people.
“Even in the most trying times, amid the most difficult circumstances, there is a generosity, a resilience, a decency, and a determination that perseveres; a willingness to take responsibility for our future and for posterity.”

As to the speech, I believe President Obama's comments on the economy do foreshadow tough decisions in the near future. Many are going to be embedded in his budgetary request that will come out two days from now.

He layed out the tasks of cutting federal spending, resuscitating the nation’s banking system, reviving the moribund auto industry, improving this nation's energy plan, and improving education; all huge tasks un-to-themselves. While the President acknowledged that these would be daunting tasks, but that we as a nation could face them together and overcome.

I believe President Obama helped to frame the state of the nation and the debate when he said:
“Short-term gains were prized over long-term prosperity… we failed to look beyond the next payment, the next quarter, or the next election… difficult decisions were put off for some other time on some other day.”

Foreign policy was a sideshow in this speech, and I understand why, but we live in a world so interconnected, that I do not believe a discussion of our economy cannot include more about our foreign relations. A lot of the success that President Obama is hoping for is working with China, Japan, Germany, and Europe as a whole.

Still it was a great speech. One every other speech he gives will be compared to, and 20 years from now another President will be preparing for a speech, and the pundits will ask can their speech compare to President Obama's first address to the nation. And in the end President Obama's message was a simple one to the nation, ‘We will recover.’

Read the text of the full speech here.

You can watch it here:

LibertyAir Blog

Monday, February 23, 2009

Entitlement Reform Morphs into Health Care Reform

One thing to come out of the fiscal summit today was the message that the true problem is rising health care costs in both the public and private sectors, not entitlements. That's good news.

Ezra Klein writes about this today:

How Entitlement Reform Became Health Reform, by Ezra Klein, American Prospect: It's testament to how deeply the idea of an entitlement crisis has embedded itself in Washington that news that Obama planned a "fiscal accountability summit" was immediately taken as proof by The Washington Post that he was readying a frontal assault on Medicare, Medicaid, and Social Security.

It was an understandable leap for the paper to make. Fiscal responsibility has, in this town, long been an anodyne synonym for entitlement reform. The "responsible" part signaled that you were courageous enough to cut treasured social programs in service of the national debt. The left, which never bought into this ruthlessly austere vision of responsibility, reacted with a defensive fury. It had just spent eight years protecting the entitlement programs from sharp-knifed "reformers." Would it have to do so again?

Today's "White House Fiscal Summit" ... will feature speeches from the president and vice president and "breakout" sessions... Notice what's not in there: Entitlement Reform.

Its absence is the product of a quiet but powerful change in thinking that has taken place in the offices of elite Washington and, now, the halls of the White House. Where a decade ago the looming fiscal threat of entitlement spending led economists and budget wonks to wear out their worry beads, today a more subtle understanding of our fiscal future dominates. In this telling, there's no such program as Social Security and Medicare and Medicaid. There's Social Security, which ... needs little, if any, help. And then there's health-care reform. "That," says Henry Aaron, a senior economist at the Brookings Institution, "is the big kahuna."

How this happened depends on whom you talk to. Dean Baker ... points to the 2005 Social Security privatization fight. ... That forced left-of-center wonks who'd not thought much about the crisis to confront the numbers...

Aaron locates his light-bulb moment in a paper written by Richard Kogan, Matt Fiedler, Aviva Aron-Dine, and Jim Horney for the Center on Budget and Policy Priorities. He remembers sitting around a table with ... an array of ... economic luminaries while Kogan and Horney presented their findings. "The long-term fiscal outlook is bleak," they wrote, and "rising health care costs are the single largest cause."

Aaron says that the "meeting was sort of a slap-the-forehead moment. I said 'you guys are saying there is no problem other than a health-care financing problem long-term!' Credit goes to them, in my opinion." ...

What everyone agrees on is that the thinking entered government in the person of Peter Orszag. In 2007, Orszag was named director of the Congressional Budget Office. From that perch, he brought Kogan and Horney's thinking to the halls of Congress. Orszag liked to show a particular slide in his public presentations... Government spending and Social Security, it says, will hold relatively constant in coming years. It's Medicare and Medicaid that chew up federal spending.

This graph, however, could be used as evidence for a simple focus on Medicare and Medicaid. The programs are unsustainable. They need to be slashed. The next slide in Orszag's presentation is titled "misdiagnosing the problem." The fiscal threat, it argues, is not more beneficiaries or ... factors internal to Medicare and Medicaid. It's the cost per beneficiary. Orszag has a graph for this, too...

And since Medicaid and Medicare pay for health services on the private market, this can only be fixed through broader health reform. Orszag ... will lead today's "health care" breakout session. Richard Kogan works for him. So it's no surprise that asked for details on today's fiscal summit, one senior administration official told me that "the most likely outcome at this point is that we focus on health care given that it's the key to our fiscal future." Another explained the focus starkly. "Health is mathematically bigger,"... The rumors originally held that eager entitlement cutter Peter G. Peterson would give the day's keynote. Now Robert Greenstein, director of the very think tank that released Kogan and Horney and Cox's paper, will speak.
Fiscal responsibility, in other words, is no longer a stand-in for entitlement reform. In Obama's Washington, it means health reform.

Alter on Obama

Jonathan Alter writes in Newsweek about President Obama and his ability to read the political situation that he has before him.
Jonathan Alter writes:

"He knows that now is not the moment to cheerlead, not when the financial players are lying dazed on the field. There will be time for that, when the banks have been 'restructured' (see, that sounds better than 'nationalized') and the credit starts flowing again....

"Obama is betting on two things: first, that people are so tired of being bamboozled that a little straight talk about their woes will make them feel more in control, the prerequisite for genuine confidence. And second, that he'll get props for trying, that the very effort of riding events instead of letting them ride him will at least offer the illusion of mastery. Once these mental pieces are fastened in place and we're fully 'in recovery,' to use therapy lingo, the enduring problems won't seem so terrifying anymore."

Watch Jonathan Alter interview by NBC's Norah O'Donnel here:

Stocks Sink to Lowest Levels in a Decade

It's all gone. The Dow Jones industrial average tumbled 251 points to its lowest close since Oct. 28, 1997, while the Standard & Poor's 500 index logged its lowest finish since April 11, 1997. All the major indexes slid more than 3 percent.

Over a decades worth of capitol in the stock markets is gone, and I think it will be a long time before this money is remade.

As has been the case for the past nine months, financial stocks were the heart of the crash. Investors are still concerned that a number of the country's largest banks could be nationalized as they continue to suffer severe losses because of their mismanagement and the on-going recession. They're also worried that banks' losses will keep escalating as the recession sends more borrowers into default.

The market's decline extends massive losses from last week when the major stock indexes tumbled more than 6 percent. The major indexes plunged through the lows they reached in late November, at the height of the credit crisis.

Obama's Budget Plans

President Obama came out today and discussed his budget plans. It is how he kicked off this afternoon's "Fiscal Responsibility Summit" at the White House. In a bold statement that I am not sure is possible, President Obama said he intends to halve the country's budget deficit by the end of his first term.

NBC correspondent Chuck Todd reported on a meeting between President Obama and governors that took place last night and today. Watch his report here:

President Obama went over a number of the steps that he is taking to fix the mess he inherited. He talked about the accounting gimicks that would no longer be tolerated, so that we would have an honest accounting of the financial state of the budget. He also declares that "Pay as you go" will be reinstated to the budget.

Watch President Obama speak at today's summit here:

Lori Montgomery and Ceci Connolly wrote in Sunday's Washington Post: "President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said."

Now it had been rumored that President Obama had considered announcing the formation of a bipartisan Social Security task force, but had relented under pressure from the liberal left who were worried about what this would do to other initiatives like healthcare. Solve healthcare and you go a long way to solving Medicare (immediate problem) and Social Security (long term problem.)

Friday, February 20, 2009

No More Accounting Slight of Hand

One of the most unreported aspects of the Bush Administration was the accounting gimmicks that they used to make deficit projections look smaller and the budget they were presenting look better. I remember a few voices like Paul Krugman and Dean Baker would raise their voices about these gimmicks, and how the deficit this nation was incurring was worse than being reported, but our media just let it slide by.

Now President Obama has written an executive order the bans four specific accounting tricks that Bush and his cronies when producing his budget which will be submitted to Congress next week. Bush and his people used these accounting trick to cover the true extent of the damage that Bush's policies were causing to the government's budget. According to Obama administration officials these gimmicks hid a budget that is $2.7 trillion deeper in the red over the next decade than had been reported by Bush officials. The new accounting involves including the spending on the wars in Iraq and Afghanistan, showing what Medicare reimbursements to physicians are expected to be, and the projecting actual costs of disaster responses. The Obama budget will also deal with revenues from the alternative minimum tax. All things that should have been in the budget in the first place. It was always one of my biggest pieces of evidence that the Bush Administration was corrupt, and at heart liars.

In discussing the changes that Obama has called for, OMB Director Peter Orszag explains:
"The president prefers to tell the truth, rather than make the numbers look better by pretending."

Noam Scheiber writes that it will be "kinda helpful to have a budget that actually means something when you're debating public policy," and added the political upside to using honest budget numbers for a change: "Why not make the long-term deficit look as large as possible at the beginning of your term? Not only can you fairly blame your predecessor at that point; the bigger the deficit looks, the easier it is to show progress, which Obama will need to do as he runs for re-election. To take one example, you can't claim savings from drawing down in Iraq if you don't put Iraq spending on the budget in the first place (which Bush mostly didn't)."

John Cole offers the administration some excellent advice:
The very first thing I would do if I were Peter Orszag and company, and this is one of the very few times I actually hope someone in government listens to me, is to go back and re-score the last decade or so of budgets using the new accounting system, so when they roll this out they can say "Here is what this year's budget would have looked like under the old system. Here is what it looks like under the new system. Here are the past ten years worth of budgets under the old system. Here they are under the new system." For political reasons, this simply has to be done.

All Gone

The Dow Jones closed down at its lowest level in six years. The gains in the market during the Bush years are all gone. The gains made after the crash which came in the wake of 9-11 are all gone. The Dow is at about half of its all-time high of 14,164, which was reached in October 2007. The total value of all shares of companies on the Dow has now dwindled to $2.45 trillion, down from $4.51 trillion. Bank stocks have been especially hit as investors grow increasingly nervous about the fragile economy.

This economic crisis is going to be one for the history books. The trouble is our government has become so split and dysfunctional, I'm not sure it can meet the needs of the crisis. Look at what has been happening in California. California is the world's 8th largest economy, but has a 42 billion dollar deficit. They needed a draconian budget of tax increases and cost cutting to keep going yet Republicans were not willing to work with Democrats and compromise. Luckily at the last minute the disaster was averted in California.

Thursday, February 19, 2009

More on the Beltway Bubble

The growing refrain these days, especially in the Liberal Blogosphere is that the Washington media and political elite just don't get it. Either they can't or don't want to see the reality of 99% of America. Dan Froomkin has written about this in recent posts on the Washington Post's White House Watch: Washington vs. the Rest of America and Obama: I Won't Play Washington Games.

Similariarly, today on the Washington Post's opinion page, columnist David Ignatius takes on his fellow members of the Washington media establishment this morning:

"Media coverage of the $787 billion stimulus package signed Tuesday by President Obama has had an air of unreality -- as if people were reporting on a baseball game or a tennis match. Is Obama up or down today? Did the Republicans gain or lose momentum? Meanwhile, as Washington obsesses over the political box score, the economy has been going down the toilet.

"You get a better sense of what the crisis feels like -- and the real impact of the stimulus package -- when you leave the miasma of federal spending and examine state and local governments. Here, the impact of the downturn is severe and immediate...

"Did President Obama have a good day Tuesday when he signed the stimulus bill? You bet he did. But the point that weirdly seems to get relatively little attention
is that it was a good day for millions of Americans who are getting hammered by
the recession."

f course on the same opinion page there is a column by David Broder who just can't get his head around the fact that Republicans are not interested in working with Obama, and bipartisanship is not what American's really want, what they want is a functional government.

Wednesday, February 18, 2009

Fed Downgrades Economic Forecast for this Year

Do not expect a quick ending to the recession/depression lite, because today the Federal Reserve sharply downgraded its projections for the country's economic performance this year. They are predicting that the U.S. economy will actually shrink, while unemployment will grow.

Dear God when will it end.

Under the Fed's new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. Personally I think they are being conservative here, I bet that it will be between 9.0 and 9.2. Of course this is using the metrics that don't count millions, and the actual number will be over 16 percent. Now the old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent. This was always a laugh. Employment is almost always the last part of the economy to heal once it emerges out of recession and is in recovery mode. Therefore the jobs picture will remain grim for years to come.

The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent. The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.

Fed officials do predict that the economy should pick up speed in 2011, growing by as much as 5 percent, which would be considered robust, though I again say they are being optimistic.

Obama Announces Plan To Keep Millions From Losing Homes

In a very bold announcement President Barack Obama laid out his $75 billion plan to tackle
the housing crisis. Calling it "a crisis unlike any we've ever known" in home foreclosures, he said his plan is necessary to help save the economy.

"In the end, all of us are paying a price for this home mortgage crisis."

"And all of us will pay an even steeper price if we allow this crisis to deepen."

President Obama unveiled the plan while in Arizona, which has been particularly hard-hit by the housing crunch. The plan he outlined is much more expensive than many experts had expected. The goal of this plan aims to keep 9 million people from losing their homes. While discussing the plan as a broad strategy, and what it will mean for the economy, the President took great care not to miss the pain that the housing problems are causing for individual families.

"The American Dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods. While this crisis is vast, it begins just one house and one family at a time."
One part will ease refinancing for people who owe more on their mortgages than their homes are currently worth. Another provides incentives for mortgage lenders to help those on the verge of foreclosure.

President Obama cautioned that the plan will not save every home but that he believes it will prevent "the worst consequences of this crisis from wreaking even greater havoc on the economy."

His final message:
"The plan I'm announcing focuses on rescuing families who have played by the
rules and acted responsibly. It will not rescue the unscrupulous or
irresponsible by throwing good taxpayer money after bad loans."

As a person with a mortgage teetering on the edge of going underwater, I really hope his plan works.

Dow Drops Almost 300

On the day that President Obama signed the stimulus package into law the markets took another tumble. The Dow Jones industrial average .DJI fell 297.81 points, or 3.79 percent, to 7,552.60. The Standard & Poor's 500 Index .SPX gave up 37.67 points, or 4.56 percent, at 789.17. The Nasdaq Composite Index .IXIC lost 63.70 points, or 4.15 percent, to 1,470.66.

Wall Street's slide pulled the S&P 500 and Dow to their lowest levels since November 20, when stocks hit 11-year lows. Just before the end of the session, the Dow briefly broke through its bear market closing low that was hit on November 20.

The day's losses brought the Dow down 13.9 percent since the start of the year, while the S&P 500 is down 12.6 percent and the Nasdaq has fallen 6.7 percent.

Tuesday, February 17, 2009

Why Geithner's Plan was a Dud

You might remember that last week Treasury Secretary Tim Geithner delivered a much anticipated speech on the next steps Treasury would be taking to bring stability back to the financial and banking sectors.

It bombed.

The question was why?

There were many who thought maybe President Obama had erred in selecting Geithner for this role, and to be honest I wondered it myself.

Geithner's plan as he presented in a live speech and press conference lacked details, and the Secretary looked scared. He made pronouncements about elements of the plan, but then said that we'd learn about the details eventually. Investors were not impressed, and the markets fell hard and quickly.

The question again was why? It turns out that Geithner decided late in the process that the plan he'd been working on was not going to work. So at the last moment he scrapped it entirely. Once the Treasury secretary and his team realized they would need a different approach, they had to decide how to present a plan that was still coming together. As they saw it, the Bush administration had a habit of presenting plans with details they had no intention of sticking to, which didn't exactly inspire confidence. Geithner preferred to "disappoint the markets with vagueness than lay out a lot of details they might have to change later."

At the same time the Treasurey Department has a shortage of personnel. To date, President Obama has not nominated any assistant secretaries or undersecretaries at Treasury, and the handful of mid-level staffers who have started work are still finding their offices and getting their building passes and BlackBerrys.

In addition Geithner and his team made a strategic decision to limit input from the financial industry and other outsiders, aiming to prevent leaks and avoid a perception they were designing the plan for the benefit of big banks. But that also meant they were unable to vet their plan with the companies involved or set realistic expectations of what would be announced.

All this combined to lead to the flop last week. Lets hope the extra time helps them to get a better plan, which can actually succeed.

Obama Signing Stimulus Bill Today, In Denver

President Obama is scheduled to leave Washington DC today and head to Denver Colorado. While in Colorado he will conduct a tour of a solar panel installation in Denver, and then will sign the stimulus bill into law at the Denver Museum of Nature and Science.

Afterwards, he'll leave for Phoenix, Arizona, where he will talk about the housing crisis tomorrow.

DC Media Hearts GOP

An odd thing is happening with that "Liberal Media", they don't seem very liberal, and they seem to be living in a bubble. Now I don't think they are "conservative" to be honest I have always thought they were corprotists, to beholden to big business which is more interested in profit than journalism. Now I think another part of the problem is that for all the news shows, we get the same talking heads and pundits, rehashing the same points to each other till an echo chamber is created which blocks out all other thoughts.

The DC media elite love to hear their own voices, and 24 hour cable news has given them an echo chamber, and I believe we now see how clueless they really are. Jane Hamsher of the blog Firedoglake and Markos Moulitsas of Daily Kos have looked into this media bubble, and have written some great posts about it.

Ms. Hamsher deconstructs the DC media's love of the "GOP obstructionists" and Markos has the research that shows those DC media types are just wrong.

They both point out that for many of the upper middle class and above in DC, they live in an economic and political bubble and they remain largely insulated from the troubles hitting the rest of the country. I have to hope the bubble bursts soon, but I have my doubts.

Monday, February 16, 2009

Obama: I'm An Optimist -- Not A Sap

After a tough start to his Presidencey, President Barack Obama sat down for an interview with the National Journal. The National Journal makes the point that President Obama appears increasingly focused on ends, not means. My point is that this seems to be President Obama's modus operandi all along. In the interview President Obama said he is open to reaching across the aisle, but policy results matter. Here are some snippets of what he told the National Journal:

"My bottom line is not how pretty the process was."

"My bottom line was: Am I getting help to people who need it?"

He also added:
"I am an eternal optimist [but] that doesn't mean I'm a sap."

This article again points out that President Obama is open to consultation, compromise and readjusting his course to build inclusive coalitions, but will keep the results he intends to produce fixed. Not a bad plan in my estimation.

Saturday, February 14, 2009

House and Senate Pass the Economic Stimulus Package

Yesterday President Barack Obama earned his first major victory with the passing of the $787 billion economic stimulus package. The news commentators are marking this as a "major milestone on our road to recovery."

The House voted 246-183 to pass the economic recovery plan, again with zero Republican votes.

Then Senator Sherrod Brown of Ohio rushed back to Capitol Hill last night, to give the economic stimulus bill its 60th vote.

The package is now on the way to the White House.

Speaking in his weekly radio and Internet address, President Obama said, "I will sign this legislation into law shortly, and we'll begin making the immediate investments necessary to put people back to work doing the work America needs done."

Watch President Obama's Internet address here:

2/14/09: Your Weekly Address from White House on Vimeo.
LibertyAir Blog

Friday, February 13, 2009

Paul Krugman: Bad Faith Economics Failure to Rise

Paul Krugman really has become one of the main voices of the liberal movement. He this week has another outstanding editorial on the stimulus package.

Failure to Rise
By Paul Krugman

By any normal political standards, this week’s Congressional agreement on an economic stimulus package was a great victory for President Obama. He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!

Or maybe not. These aren’t normal times, so normal political standards don’t apply: Mr. Obama’s victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama’s postpartisan dreams.

Let’s start with the politics.

One might have expected Republicans to act at least slightly chastened in these early days of the Obama administration, given both their drubbing in the last two elections and the economic debacle of the past eight years.

But it’s now clear that the party’s commitment to deep voodoo — enforced, in part, by pressure groups that stand ready to run primary challengers against heretics — is as strong as ever. In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.

And the rhetorical response of conservatives to the stimulus plan — which will, it’s worth bearing in mind, cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged.

It’s “generational theft,” said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.
It’s “destroying my daughters’ future. It is like sitting there watching my house ransacked by a gang of thugs,” said Arnold Kling of the Cato Institute.
And the ugliness of the political debate matters because it raises doubts about the Obama administration’s ability to come back for more if, as seems likely, the stimulus bill proves inadequate.

For while Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough. We’re probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support.

We’ve just seen how well that worked.

Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration’s plans on that front, which also came this week, landed with a dull thud.

The plan sketched out by Tim Geithner, the Treasury secretary, wasn’t bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going. Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers’ expense? Or will the required “stress test” act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.
Over all, the effect was to kick the can down the road. And that’s not good enough. So far the Obama administration’s response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It’s early days yet, but we’re falling behind the curve.

And I don’t know about you, but I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

There’s still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can’t.

I think it’s worth revisiting one point made by Professor Krugman that I have not heard any other comentator or pundit make:

[Obama's stimulus] costs substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq.
Seriously, the Bush Administration has taken $3 trillion dollars out of the economy, how did we let this happen? And why can't the media point that out when they are talking to Republican whiners? The Bush Administration created a huge hole, and it is going to take a huge response. The trouble is the plan that came out of the Senate is probably to weak.

My only hope is that Obama and his people are actually competent, and that more will be coming down the pike.

Michael Hirsh: Tear Down Wall Street

Michael Hirsh of newsweek has a very strong article in this week's magazine comes out strong for radical changes to Wall Street and the American economic system that has developed. He points out that the survivors of Wall Street melt down who appeared before Congress this week are 'too big to fail', but are doing just that. They're failing, now what should we do.

It was a classic populist spectacle, reminiscent of William Jennings Bryan's "Cross of Gold" speech or Huey Long's mid-Depression campaign to "Share the Wealth." There, arrayed before Rep. Barney Frank and other voices of the people's outrage, sat the former titans of Wall Street, each of them trying desperately to convince their congressional questioners, and the world, that they deserved some fate other than oblivion.

And these were the survivors! The hardy ones. The eight CEOs who appeared before the House Financial Services Committee on Wednesday—among them Jamie Dimon of JPMorgan Chase, Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley—were actually the bankers who have best navigated the financial turmoil in recent months after taking money from the "Troubled Asset Relief Program," or TARP. That may help explain why some of the angrier congressmen, like Gary Ackerman of New York (who last week roared to former SEC officials: "You couldn't find your backside with two hands if the lights were on!") were a little calmer this time. But it was a striking display of the new balance of power in America. One by one, the former "captains of the universe," as Rep. Maxine Waters described them, genuflected before their congressional masters. "I feel more like a corporal of the universe," Bank of America's Ken Lewis joked weakly. The CEOs described how much they've slashed their salaries and bonuses, how hard they've tried to lend out the billions of taxpayer dollars, and how quickly they'll try to get off the federal dole.

Truth is, this is all mostly whistling past the graveyard—which is where most of these giant banks are headed someday. Or at least let us hope so, while Washington still has the power to make it happen. With a couple of possible exceptions, these financial behemoths can't be allowed to survive and securitize us to the brink again, only to have to be rescued because they're too important to the economy to be permitted to go bankrupt. This is still the heart of the crisis—the problem that President Obama's stimulus package and Treasury Secretary Tim Geithner's financial plan don't even touch. If it weren't for the fact that too many of these banks are too big to fail—"systemic risks," in the jargon—we would have been through a lot of the worst already. Bankruptcy and oblivion is supposed to be the fate of market players who make bad choices. That's how capitalism works. The system gets cleaned out, the survivors deservingly pick up their failed rivals' business and get richer, and the economy comes back to life quickly. But that's what is not working now. Oversize screw-ups like AIG and Citigroup survive on, zombielike, with Fed and Treasury "commissars" on the inside watching their every move, because no one can bear the thought of how many other institutions they would take down if they failed.

Among those who appear to understand this is Federal Reserve Chairman Ben Bernanke. " 'Too big to fail' is an enormous problem," Bernanke said in his own congressional testimony on Tuesday. "We are very unhappy with this problem, and we think that it should be a top priority to fix it as we go forward, so that … the situation doesn't arise again." One of the most telling moments at the CEO hearing came when one congresswoman asked if any of them had grown too large. All were silent. At other points, the CEOs tried to make the case that, with a thaw in lending barely under way, the issue is not with them but with the "nonbank" sector that was responsible for most of the worst mortgage-lending practices during the bubble. What they didn't say is that some of their own companies, among them Bank of America, actually went out and bought the most predatory and seamiest nonbank lenders, like Countrywide Mortgage. Just swallowed them whole. They're incorrigible.

This is the main reason why, to the market's chagrin, Geithner declines to provide details on how to unwind the bad loans and assets at these big companies. Geithner's predecessor, Hank Paulson, dithered over this problem as well. The indecision has been dragging on for five months. That's because the problem is all but insurmountable. If you value those toxic assets at actual market levels, most of these banks would become insolvent. Letting them fail would almost automatically trigger the depression the government has been trying to avert. But if instead the government artificially inflates the assets' values, it commits itself to spending trillions more in public money at a time when Congress and the public are fed up with bailouts (the IMF estimates that potential losses are still $2.2 trillion; Bernanke countered Tuesday that only half of those are with U.S. institutions, but he admitted the banks still have yet to write down about $500 billion in losses). And if the government declines to do either of these things—if it neither values the bad assets at market level nor buys them up at inflated prices—bank stocks will continue to be suspect and private capital will stay on the sidelines. The economy will remain frozen.

In other words, there are no good choices. According to a Treasury source, Geithner knows what a lot of these assets are worth. "The government has gone through these assets very carefully," Citigroup's Vikram Pandit told the House committee. But knowing the value doesn't help. So the Treasury secretary is trying to finesse his way through, probably case by case, hoping he can gradually nudge asset values higher by restoring confidence to the market.

Geithner may be too optimistic. As one senior economic official in Washington said to me the other day, "the Obama administration has got as much political capital as it's ever going to have. This is the time to lay it all out." In other words, tell everyone just how bad the problem really is. It's more than a matter of how much public money to commit. The "fundamental reshaping" of the financial system that Geithner referred to on Tuesday has to be part of the solution as well. The Citigroups and AIGs should be carefully broken up as soon as possible.

True, you're not going to place artificial limits on a firm's size; that's a bridge too far into socialism. But as John Kay of the Financial Times wrote on Wednesday, there's no reason why we can't rediscover the wisdom of Senators Glass and Steagall during the Depression. "Tension between the buccaneering culture appropriate to trading and investment banking and the meticulous processing and caution needed for retail banking is perpetual," Kay wrote. Indeed, as Joseph Stiglitz wrote in 2003, the wisdom behind Glass-Steagall goes "back even further to Teddy Roosevelt and his efforts to break up the big trusts." Let's simply acknowledge that. Yes, finance marches on. We're not going back to 1933. But some things about human nature never change. Now that we understand the fallacy of the "dispersion of risk" idea—which Wall Street, with a big assist from Alan Greenspan, sold us on before the crash—we should arrive at about the same place as Glass, Steagall and Teddy Roosevelt did. We can't have a free-market economy dominated by institutions so huge that they don't have to play by free-market rules. And yet we still do.
© 2009

Senator Patrick Leahy wants to see Bush and Cheney Investigated

Senator Patrick Leahy has a diary on Daily Kos today. He is pushing a petition to investigage Bush-Cheney abuses of power. You can sign the petition here.

Thursday, February 12, 2009

Judd Gregg withdraws nomination as Secretary of Commerce.

Judd Gregg, the Republican Senator from New Hampshire has announced that he is withdrawing from consideration for Commerce Secretary, citing “irresolvable conflicts” on the stimulus package and the Census. Gregg said in a statement:

However, it has become apparent during this process that this will not work for me as I have found that on issues such as the stimulus package and the Census there are irresolvable conflicts for me. Prior to accepting this post, we had discussed these and other potential differences, but unfortunately we did not adequately focus on these concerns. We are functioning from a different set of views on many critical items of policy.
Gregg's statement is surprising because last week Senator Gregg actually gave the recovery package a bit of an endorsement (if half-hearted) saying:

"I think the one that's pending is in the range we need. I do believe it's a good idea to do it at two levels, which this bill basically does, which is immediate stimulus and long-term initiatives which actually improve our competitiveness and our productivity."
Guess I was not the only one surprised by the news as MSNBC is reporting that the White House press office was "surprised" by Gregg's withdrawal, saying that it was "news to them." The Politico is echoing MSNBC in their reporting that the White House was “totally caught off guard” by the news.

Personnally I'm glad he will not be the Commerce Secretary. I want someone who is more progressive, pro-worker, and less beholden to big business.

Agreement on the Stimulus

This happened a lot faster than I thought it would. Yesterday, the House and Senate had ironed out the differences between their two recovery packages to agree on a $789 billion bill. Senate Majority Leader Reid went out in front of the television cameras to boast:
“The middle ground we’ve reached creates more jobs than the original Senate bill and spends less than the original House bill.”

The Washington Post noted that, after all the negotiating and compromising, “the bill followed remarkably closely to the broad outline that Obama had painted more than a month ago,” with a roughly 60-40% split between spending and tax breaks. That is still a terrible split. At best it should have been a 70-30% or even better a 75-25%.

That said the compromise between the House and the Senate did make vital improvements to the Senate version, which would have created 9 to 12 percent fewer jobs than the version passed by the House while costing $17 billion more.

The new compromise cuts out big business giveaways, restores education funding, and raises funding for science research, among other improvements to the Senate bill:
– Eliminates big business tax giveaway. The compromise cut a provision from the
Senate bill that allowed companies of any size to claim an estimated $67.5 billion in tax refunds this year and next, by allowing companies to write off losses from 2008 against taxes paid over the last five years.
– Restores House funding of food stamps. The Senate had granted $16 billion in food stamp aid, but the new compromise expands that to the House’s full $20 billion funding.
– Removes nuclear loans. The $50 billion in loans for the nuclear industry, which were snuck into the Senate bill by “budget gimmickry” and which would not have created a single job for many years, were completely eliminated by the conference committee.
– Slashes tax cut for rich homeowners. The Senate bill granted a $15,000 tax cut to new home buyers, a provision Nobel Prize winner Paul Krugman called a “bonus to affluent people who flip their houses.” The new compromise “drastically reduced” the tax credit, cutting the overall cost from $35 billion to about $5 billion.
The compromise bill allocates $30 billion for smart grid technology and energy efficiency measures and nearly $46 billion to fund education and modernize schools, which is considerably higher than the Senate’s $39 billion total.

The Wall Street Journal also notes that the compromise significantly “expands federal aid to an array of programs aimed at the poor and jobless, with billions of dollars for health care, unemployment insurance, food stamps and other programs.”

Though the compromise bill is an improvement over the Senate version, it's too small and still includes non-stimulative tax breaks. The spending in the bill, the most stimulative component, fell from $604 billion as introduced in the House to $637 billion when later passed by the House, falling again to $545 billion in the Senate-passed version. The final compromise has only $513 billion in spending, with $276 billion in tax breaks.

One of the most egregious problems with the compromise is the tax breaks. Some of these tax breaks, such as the credit for new home buyers, are particularly non-stimulative, and the largest tax break is the $70 billion to spare millions of Americans from paying the alternative minimum tax. I am still not sure why the AMT is in there; the AMT has nothing to do with recovery. The AMT will offer no stimulus to the economy, and it would have been taken care of later in it's own bill, as has happened every year for over a decade. This was a wasted $70 billion. That $70 billion could have really helped the states, or gone into infrastructure investment.

Though President Obama admitted this week that “the plan is not perfect,” it’s clear the congressional compromise is a dramatic improvement over the Senate bill passed earlier this week. The final bill, after passing both houses of Congress, is expected to arrive on Obama’s desk no later than Monday.

Wednesday, February 11, 2009

Geithner's Plan Falls Flat

Yesterday Treasury Secretary Timothy Geithner presented the Obama’s administration’s Financial Stability Plan to deal with the financial system’s toxic asset overhang and ease, if not reverse, the ongoing decline in bank lending to households and corporations.

To say that it went over like a lead balloon would be an understatement.

Out of the three broad strategies that most economists say are available - nationalization, ‘good / bad bank’, backstop guarantee on ring-fenced toxic assets - the administration plan offers elements of all three.

I am always wary of a plan that offers a little bit of everything.

Geithner’s first program involves a mandatory ‘stress test’ for all banks with $100bn-plus assets which should also shed some clarity on the individual banks exposures and valuations of toxic assets. This I like because there is still too much we do not know about the financial crisis. A major part of this whole economic meltdown has been fear of the unknown. Safe investments and secure loans have been damaged by fear of toxic assets.

According to the plan Geithner laid out yesterday, after the stress test the Treasury’s Capital Assistance Program would stand ready with preferred shares / warrants injections where needed, only this time with clear lending requirements and strict limits on dividends, stock repurchases and acquisitions next to a $500,000 compensation cap. This solves some of the problems with the original $350 billion that Paulson injected into the financial markets late last year.

Geithner claims that any capital investments made by Treasury under the CAP would be placed in the Financial Stability Trust. However, Geithner left unclear what other options are there for institutions that are severely undercapitalized or fail to attract public capital on a recurring basis (Bank of America and Citigroup are two examples) Yes the program aims at ensuring that there is full transparency disclosing all relevant information on capital recipients at; but is that enough to give Geithner our trust?

The second program Geithner spoke about was the Public-Private Investment Fund (PPP). This program aims at setting up a new lending/guarantee facility (the so called Bad Bank solution). This program would work by leveraging an initial private capital commitment with government funds to an initial scale of up to $500 billion (and if you look at the fine print it can be expanded to a maximum of $1 trillion.) The aim of this idea is to involve private capital on a large scale that sits currently on the sidelines while also allowing private market forces to determine the price for currently troubled and illiquid assets.

Personally I think yesterday’s tanking of the Dow was because Geithner mentioned using private capitol in his plan.

A similar experiment was tried before with the private sector sponsored M-LEC vehicle that ultimately proved unviable due to asymmetric toxic asset exposures of participating banks and due to still unresolved asset valuation issues. Commentators agree that for a similar plan to work this time, the government will have to assume a potentially substantial downside in order to induce otherwise unwilling investors to participate in view of the size of potential losses.

Renowned distressed debt experts such as Edward Altman and Martin Fridson note that the best time to invest in distressed debt is when default rates peak. Mind that high-yield default rates are set to rise to 15-20% sometime in 2010 from currently 4-5% due to very bad credit quality at the outset of the cycle.

Yet this again is putting all the risk on the public and all the reward for those who got us in this message.

The third program put forth by Secretary Geithner is an expanded version of the previously $200bn Federal Reserve Term Asset Backed Securities Loan Facility (TALF) program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.

Geithner points out that securitization created about 40% of the demand for new loans extended to consumers, students, and auto buyers. The decline of securitized lending to the tune of $1.2 trillion between 2006 and 2008 leaves a hole that needs to be filled if a severe lending contraction should be prevented.

Economist Nouriel Roubini in his latest writing It Is Time to Nationalize Insolvent Banking Systems argues that, ultimately, nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – possibly – even the unsecured creditors in case the bank insolvency is too large; it provides a fair upside to the tax-payer. Moreover, it bypasses the asset valuation issue as any overpayment goes back into taxpayers pockets. “With the government starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the FDIC the administration is putting in place the steps for the eventual and necessary takeover of the insolvent banks.” This might well explain some of the negative market reaction.

The Treasury has stressed that while the ongoing price correction will stimulate home demand, there is a need to reduce foreclosures, which otherwise adding to the excess overhang of homes pose the risk of price over-correction, pushing more homeowners into negative equity. The Treasury plans to announce a Housing Program in the next few weeks to help refinance mortgages and contain foreclosures by reducing monthly payments for homeowners. The program will be financed by using $50 billion from the remaining TARP funds. To increase lender participation, the plan makes it compulsory for banks using government funds under the Financial Stability Plan to participate in foreclosure mitigation. In order to stimulate home demand and help the current homeowners refinance, the Treasury and Fed will continue with their November 2008 plans use $600 billion to buy MBSs and debt of the GSEs using and reduce mortgage rates to the 4-4.5% range. More importantly, the plan will increase flexibility to modify loans under the Hope Now and FHA Programs started in 2007-08 to help increase participation and foreclosure prevention.

Efforts to stimulate demand reducing mortgage rates and offering tax incentives will be largely ineffective as they are a small factor in determining home demand relative to factors such as tighter lending standards, changing dynamics for households - job and income loss, wealth erosion, rising savings rate, and low expectations of income or asset appreciation. These factors will constrain home demand in the short run while potential buyers await further price correction and banks don’t see the viability in offering mortgage for a house whose value is expected to fall.

As a result, the government needs to focus on the supply side of the market by refinancing at-risk mortgages and preventing foreclosures that will only add to the existing overhang of houses. Moreover, government’s loan modification program should reduce mortgage principal rather than just reducing the mortgage rate or extending the loan maturity, which has been the case in past government programs. Unless the problem of insolvency among a large number of households is addressed, default on modified mortgages will also continue. Also, given the large number of homeowners with negative home equity, the program will need much larger funds - over $600 billion to $1 trillion though the actual cost might be much less, since the government will receive a share from future home appreciation. Monetary incentives for servicers are also low and ineffective. Even the number of homeowners the program plans to target, 1.5-2 million is a very small fraction of the over 12 million homeowners with negative equity. In fact, several Democrats are pushing a legislation to allow bankruptcy judges to change mortgage terms that would allow lenders to reduce the mortgage principal for primary homes and bring down monthly payments. To increase participation, they support offering monetary incentives for servicers while lenders will be entitled to a share if the homeowner sells the house and also have the government share any losses on the modified mortgage.

Looking at the shortcomings of past government programs such as the Hope Now, Housing Retention and FDIC programs, the new program should be mandatory for lenders in order to increase participation.

The government will also need to share the cost of modifying the loan, by matching the principal or the interest rate cut in a proportionate or less than proportionate amount. By guaranteeing the loans, the government will be the senior debt holder. The new interest rate should be based on the risk assessment of the borrower and all three parties – homeowner, lenders and servicers, and the government should share the cost of modification. However, determining the extent of principal reduction based on the true value of the house, and dealing with second lien mortgages and the diverging interests of mortgage servicers will be challenging.

Under the new guidelines for compensation issued by the Treasury, firms receiving federal aid will be subject to shareholder say on pay and will be required to cap executive compensation at $500,000 with any additional compensation given out in restricted stocks which can be cashed only after the government has been repaid or the bank has satisfied repayment obligations, and met lending and stability standards. Moreover, bonuses and compensation for other top executives will also be reduced. At the very least the Treasury is going to require disclosure of the compensation structure and strategy, and expenditure on luxury items. Still, while the government's intervention is warranted, the compensation reform being put forward does little to align risks with rewards. Sadly reports are that Geithner fought for real compensation reform.

A large share of the compensation can and will be given out in restricted stocks including compensation for several traders and funds managers who are not under the lenses of the current plan. These measures also give a green light to those who have already received large compensation and severance packages at the troubled banks. More importantly, the measures might act a disincentive in attracting credible executive talent to these troubled institutions in the future who can help deal with the bank losses and overhaul. Wall Street compensation is determined in a competitive market with CEOs joining a firm offering the most attractive pay packages and perks. Many banks are already reluctant to seek capital injection from the Treasury or are contemplating to payback past borrowings in order to avoid government scrutiny over their compensation packages. There is too much voluntary action on the part of the banks. The government needs to be much more forceful. These companies caused the financial crisis, and should not have the luxery of choosing to take part in this package.

To reduce excessive risk-taking in the short-run, compensation, bonuses and even severance packages should be based on the long-term performance of the employee relative to the risk undertaken with large part of the payments given out in restricted stocks that can be redeemed over a longer period of time.