While the Economy Tanks, the President's Team Dawdles
There is no doubt about it. Barack Obama is an effective and inspiring president. His address to the Joint Session of Congress this week cheered all those who heard it.
His courtesy and respect for colleagues -- regardless of political affiliation or status is refreshing and will no doubt raise the overall standard of political and civic conduct.
His budget is honest, ambitious and fair.
On almost every day of his first 38 days in office he has taken firm, sometimes transformational action.
But in the most critical area, the economy, he is allowing his economic team to dawdle. That could be fatal to his presidency. Geithner, Summers and Bernanke are still lagging behind events. If he is not careful he, and they, will be overtaken by these events, and the U.S. could suffer the fate of Japan.
He needs to demonstrate a much sounder grasp of the colossal urgency of this crisis, and inject that urgency into the dawdling of his economic team. His advisors are schooled in Greenspan-style economics, and they are having to learn about intervention. While they gingerly climb this learning curve, the US economy continues to tank, the banks face systemic failure, companies are being bankrupted and unemployment is rocketing.
The impact on the global economy is incalculable.
America's total income (GDP) in the final three months of 2008 declined by nearly twice that expected -- by 6.2%. This is its worst performance since 1982.
The story of this collapse in output is the big story -- beside it, everything else, even Iraq, can wait.
While confidence in the president rises, consumer confidence has slumped.
Plenty of Americans would have been home, listening to the president's address to Congress. They had the time, because they are jobless. In fact in the third week of February, 36,000 more Americans lost their jobs than in the week before -- a record. Economists are predicting job losses rising to 1 million a month.
For these unemployed men and women, the euphoria of the speech will have quickly evaporated.
Consumer behavior and attitudes show that Americans do not really believe the president has a grip on this recession. They do not see it easing up in 2009, and reported record declines in their personal finances and prospects.
Each day provides evidence that the US economy is spinning downwards into a debt-deflationary abyss, not dissimilar from that experienced by Japan for 19 years now. An abyss into which is dumped rising and costly debts, falling wages, falling investment, and falling prices, including house-prices (still falling in Japan after 19 years!).
US house prices have fallen 19.2% year on year. In Phoenix they fell by 34% and in Las Vegas by 33% over the year. These are dramatic and unprecedented falls -- hurting the whole of the economy. And there seems no end to their declines.
As I have said before in this column, the high cost of borrowing and of servicing existing debts is crippling companies and forcing them into bankruptcy and layoffs. And it's not just risky companies that are facing this threat. Warren Buffet highlights the high borrowing costs that even a AAA company like Berkshire must pay:
"Funders that have access to any sort of government guarantee -- banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal reserve, and others who are using imaginative methods (or lobbying skills) to come under the government's umbrella - have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be. ... Though Berkshire's credit is pristine -- we are one of only seven AAA corporations in the country -- our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing."
At a time of the greatest debt crisis in history, these high borrowing costs are hurting companies like Berkshire and causing business bankruptcies and home foreclosures to balloon upwards. Each day inflicts more damage -- on the economy, on society, on families and on individuals. And each day the stock market shows its lack of patience with an administration prevaricating over the economy.
The Fed is the slouch here -- dragging its feet. Fed Governor Bernanke needs to urgently get all borrowing costs down -- for companies as well as households; for risky as well as safe loans. At this stage of the economic cycle, very few loans are without risk. And if businesses and entrepreneurs are to take the risks needed to pull us out of this crisis, they need affordable finance.
The Fed can get rates down by applying the policy of quantitative easing far more aggressively.
And then there are the banks. Collapsing banks can't wait while Treasury embarks on a painstaking and punctilious "stress test." The stock market knows what Treasury still needs to admit: the banks are bust. Their CEOs lack all credibility. Until they are nationalized the Dow will continue its very rational path downwards.
The point of temporary nationalization will not be to score political points, or embrace so-called European-style socialism. The point of temporary nationalization will be to stabilize the banking system (and the stock market) and bring about a blanket reduction in borrowing costs -- for all borrowers.
The point will be to prevent the United States economy failing like Japan has done for 19 years now.
The economy cannot wait for the president's patient building of bipartisan agreement. Those congressmen and women that cannot grasp the gravity of this crisis need to be sidelined.
Millions of unemployed Americans can't wait while Ben Bernanke, Tim Geithner and Larry Summers learn from the mistakes made by Japan in the 1990s.
Millions of homeowners can't wait till economists unlearn the dogmatic and misguided theories of Ayn Rand, Milton Friedman and Paul A. Samuelson.
The president must not allow himself to be slowed down by the timidity of his current economic team. If they don't stop dawdling, he should take over the reins and get himself a new team.