Obama's Big Experiment in Economics
Below is an op/ed piece from Tom Friendman at the NY Times concerning Obama's economic policies. Basically, the goal of these policies is that all of them put together will alleviate some of the damage being done to the economy compared to doing less. It follows in the same foot steps as FDR. It is not movtivated by politics, it is motivated by economics.
Personally, I have grown weary of all the political yelling back and forth about whether Obama's policies are right or left (socialistic or not socialistic enough, etc.). The current situtation is not about politics it is about economics only. Forget about ideology, it is meaningless at this point, it is all about survival and our survival is not guarantied. Make no mistake the current economic crisis is not over, it is time to bail water out of a sinking economy, and any container will do. Text in bold is my emphasis.
While campaigning for the presidency in 1932, in the midst of the Great Depression, Franklin Roosevelt gave a commencement address on May 22 at Oglethorpe University in Atlanta that probably describes President Obama’s strategy today — and the big bet he has made — as well as anything could.
“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation,” said Roosevelt. “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.”
When you total up all the emergency economic policies that Mr. Obama has now put in place — a nearly $800 billion stimulus, mortgage relief, a private-public program for buying up toxic assets and a huge capital injection into the banking system by the Federal Reserve to lower interest rates and expand credit — they constitute one big experiment.
Together, these policies — call them Obama Rescue Phase I — represent a huge bet that the administration can confine this economic crisis to a really nasty recession, the sort of thing that might constitute a long chapter in an economic history and not a 21st-century Depression that would trigger a whole bookshelf on the theme of: “How Barack Obama Won an Election and Lost an Economy.”
From the left, Mr. Obama is being ripped for having too much of a market-based approach and not just bowing to the inevitability of nationalizing insolvent banks. From the right, he is being ripped for too much government intervention and not letting market forces play out.
My own sense is this: The Obama package represents the sum total of what was minimally necessary to prevent systemic breakdown, what was politically possible with a Congress that was in no mood to shell out another dime to bail out Wall Street, and what was operationally preferable — at this time — which was a strategy that did not require nationalizing Citigroup & Friends.
As Obama officials put it to me: If you’re certain that you have to do some radical surgery — nationalize the banks — do it sooner rather than later. But if you think you might have an option, and if you think that nationalization brings with it other huge problems — like who is going to run these banks and who will want to work in them if the government takes over — and if you think that Congress isn’t going to give you another cent, then you try other things first.
Mr. Obama is betting that the totality of economic policies his team and the Federal Reserve have put in place will act, like radiation therapy, to halt the spread and reduce the size of the cancerous tumors eating away at our financial system — and stimulate enough new growth and optimism so that Phase II will be small enough to get past Congress and the public.
As Treasury Secretary Timothy Geithner told ABC News, “If we get to that point” — where more funds are needed — “we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively.”
Have no doubt, Phase II is coming. At best, it will require hundreds of billions of dollars more, at worst more than a trillion, to deal with more bad loans and toxic assets weakening the economy — problems that Phase I can’t fully absorb. Because unemployment is still rising — ensuring that the initial spate of mortgage defaults, which came from loans to people who could never repay, will be followed by another spate of defaults from those who could repay but now can’t because the deteriorating economy has stripped them of their jobs, their businesses or their credit lines.
The Obama strategy, said Robert Hormats, the vice chairman of Goldman Sachs International, “is based on the idea of mutual reinforcement, that when you put it all together — the money stimulating growth, the money relieving the credit crunch in the housing sector, the money injected by the Federal Reserve to lower rates, and the various initiatives to heal the banks without nationalization — you’ll get a boost to the economy that will be greater than the sum of its parts.”
The success of the president’s approach, added Hormats, will depend on everything, indeed, working together — “that the fiscal stimulus will improve the housing markets by creating more employment and growth, the improvement in housing will take pressure off banks, and less pressure on the banks will improve the availability of credit that will help housing and business job creation.”
That is the president’s big bet — his first big Rooseveltian experiment. If he’s wrong, Phase II of the bailout will start with a “t,” as in a trillion, and it will trigger a ferocious political fight in Congress. But, if he’s right, it will start with a “b,” as in billions, Congress will be more easily finessed, and we just might emerge from this crisis without making too much economic history.