The Obama Speech: Best And Worst
by dday
I decided to take in the President's economic speech today (text here). Ultimately, speeches mean far less than actions, and right now the actions still reflect a mixed picture. But a speech can move the public, can get them comfortable with the big picture of the President's program aside from the day-to-day ups and downs, and on that front I think Obama did a solid job. These were the key set of paragraph, to me:
It is simply not sustainable to have a 21st century financial system that is governed by 20th century rules and regulations that allowed the recklessness of a few to threaten the entire economy. It is not sustainable to have an economy where in one year, 40% of our corporate profits came from a financial sector that was based too much on inflated home prices, maxed out credit cards, overleveraged banks and overvalued assets; or an economy where the incomes of the top 1% have skyrocketed while the typical working household has seen their income decline by nearly $2,000 [...]
There is a parable at the end of the Sermon on the Mount that tells the story of two men. The first built his house on a pile of sand, and it was destroyed as soon as the storm hit. But the second is known as the wise man, for when “…the rain descended, and the floods came, and the winds blew, and beat upon that house…it fell not: for it was founded upon a rock.”
We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity – a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad.
That's a very strong perspective, particularly the highlighted portion, addressing inequality and the out-of-balance economy. But the very best part of the speech didn't appear in the prepared remarks; once again, we get some interesting truths from the ad-libs. Talking about education, he paused to say that we need American students to make things again. Here's a rough transcript:
And by the way, one of the changes that I'd like to see, and I'm going to be talking about this in the weeks to come. It's once again seeing our best and our brightest commit themselves to making things. Engineers, scientists, innovators. For so long, we have placed at the top of our pinnacle folks who can manipulate numbers. And engage in complex financial calculations. And that's good, we need some of that. But you know, what we could use are some more scientists and engineers who are building and making things that we can export to other countries.
This is the rot at the heart of the American economy right now, a sinking feeling that we are no longer creative, that we no longer have the same spirit in the 21st century that we assumed to hold in the 19th and 20th, the feeling of sloth, the idea that the world is passing us by, the unease as we try to sustain ourselves through selling each other lead-filled Chinese toys and pushing numbers around on a page. This is exactly the risk at the center of an unbalanced economy, much like an unbalanced stock portfolio. Having given away innovation, having given away industry, we turned Wall Street into the manufacturing capital of the nation, much to our peril. The jobs of the future cannot remain in the same fields as the jobs of the past. We need a continued focus on green jobs, not just at the level of engineering and innovation and technology, but at the lower levels of building and creating from raw materials the new energy devices and smart grids and high speed rail cars. And we can only do this by shrinking the size of the financial sector relative to the overall economy, and diversifying our economic picture so we are not at the mercy of the banksters.
For the first time, I get the sense that the President recognizes this imbalance and is committed to reversing course. But this is not to say that I completely agree with his methods - for instance, Obama offered a full response to critics on the left who think the banks have leveraged their power to prevent the necessary solutions to the financial crisis, like nationalization:
On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.
Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.
Greg Sargent reads the tea leaves and thinks that Obama substantively responded by saying he wasn't ideologically opposed to nationalization. I think that's less important that this new, substantive disagreement, that nationalization would prove more costly. Which is not false - we saw in the IndyMac receivership that the eventual cost totals were much larger than expected, and as Matthew Yglesias notes, nationalization would require up front money that Congress would be highly unlikely to appropriate. However, there's a bit of a false frame here. Lining up the PPIP against nationalization and saying that the PPIP is cheaper only makes sense if you think both have an equal potential of working. If, as I do, you think that the PPIP probably won't work, and that the problem is not one of liquidity but insolvency, then getting to nationalization quickly before throwing hundreds of billions more down a rathole would be significantly cheaper.
And evidence on my side of things, that the banks are insolvent, can be seen in the silly games some of them are playing to try and look profitable.
Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.
How did it do that? One way was to hide a lot of losses in not-so-plain sight.
Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.
The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.
Ingenious - dump all the write-downs into a missing month.
When you scratch the surface of all this, you can plainly see that even the banks announcing record profits are hopelessly insolvent, and will continue to spiral downward as the economy remains stuck.
Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.
KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.
First-quarter net income rose 50 percent to about $3 billion, Wells Fargo said last week in announcing preliminary results that topped the most optimistic Wall Street estimates and sparked a 32 percent jump in the stock. The bank attributed the profit to a surge in mortgage originations and revenue from Wachovia Corp., acquired in December. Full results are scheduled for April 22.
The $120 billion in "stress losses" kind of puts that whole $3 billion quarterly profit in perspective, don't it?
So while I agree that nationalization would be more expensive on a one-to-one basis, and I don't even totally fault Obama for, given the institutional constraints, giving some separate option the old college try, the inevitability of dealing with the insolvent banks argues for a quick remedy.
My final analysis is that Obama understands the problems in the structural imbalances of our economy, but still relies on the arguments of his advisers, which will restrict opportunities for the fundamental reform we need.
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