Things are beginning to sort out as the Obama administration takes hold and the scope of the international financial/economic crisis becomes more clear.The Obama financial-rescue plan is far more important than the economic-stimulus package, passed earlier this month, or the mortgage package or the Detroit auto bailout now on the table. The stimulus package won't provide significant stimulus in 2009 or 2010, but it will put tax-cut money into people's pockets later this spring and start federal money flowing. The mortgage package will provide limited relief to homeowners in danger of losing their homes, even as it generates resentment among those who are making their mortgage payments on time. And, if GM and Chrysler do not go into formal bankruptcy, they will have to accept conditions approximating bankruptcy in order to qualify for fresh federal billions.
The crisis — essentially a global credit crisis — began with financial institutions and that is where the primary battle must be waged. Right now debate is taking place about whether too-big-to-fail institutions such as Citibank and Bank of America should be "nationalized." The Obama White House denies any such intention, but as a practical matter, the Federal Reserve, Treasury and Congress will do what they have to do to keep these financial behemoths operating. Bailout funds already allocated have given the government preferred shares in exchange.
As Part Two of the rescue proceeds, more money almost certainly will flow to the biggest and endangered institutions, meaning de facto nationalizion for a brief period until they can be sold to new private ownership, minus their present toxic assets. What matters, right now, is that the global financial system be kept functioning and that money be kept flowing — even if the money, for a time, is printed by central banks.
Second, it would be well to view skeptically the Obama administration's pledges regarding deficit reduction. Pentagon spending is likely to remain high, so long as Afghanistan and anti-terrorism efforts remain high on the agenda, as they surely will over the next several years. A draw-down in Iraq will be gradual and unlikely, overall, to result in defense-spending cuts.
"Taxing the rich" can be a popular campaign theme but, in the end, revenue projections from such a strategy always prove disappointing. "Government efficiencies" can be promised but rarely result in budget savings. Better to face the reality that the cumulative costs of the financial/economic crises, and the trillions in spending allocated to fighting them, are likely to keep the federal government deeply in the red for at least the next four years.
Third, the sheer weight of the domestic and international efforts employed against the crises are likely to bring us out of it far sooner than, for instance, the decade it took us to find our way out of the Great Depression. Financial markets, business leaders, and consumers all are watching for positive signals which will make them think political leaders know what they are doing and have considered strategies for recovery.
A survey last week of financial asset managers had them predicting an economic rebound by the fourth quarter of 2009. That seems too soon. But when confidence begins to return, a pickup could begin before mid-2010.
Treasury Secretary Tim Geithner botched an outline presentation earlier this month of Financial Rescue, Part Two. Had he not done so, the Dow might have risen 1,000 points, rather than fallen 300, the following day. Next time around, Geithner, Federal Reserve chair Ben Bernanke, White House economic advisers Larry Summers and Paul Volcker, and others, will need to present a credible and detailed Part Two package. If and when that happens, a real basis for a turnaround will exist.
As President Obama noted in one of his early messages, the American people are no less skilled and talented today than they were when the crisis hit. Greed and incompetence in the financial sector brought us to this point. It is the financial sector where things must be set right. When capital again begins to flow from that sector, various stimulus and bailout packages will be dwarfed in importance.
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