Friday, February 27, 2009

Obama on the Economy

As much as I like having Barack Obama in the White House, and as much as I loved and admired his speech Tuesday night, I still think his economic policy overall and with respect to the financial sector is appalling. Either he doesn’t understand the problem, or he is catering to some power group and is unwilling to cross them in addressing the solution.
The concern is that, if we do not re-start lending in this country, our recovery will be choked off before it even begins. You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education, how stores stock their shelves, farms buy equipment, and businesses make payroll.

But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. And with so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or even to each other.

First, an economy for which the “lifeblood” is “the flow of credit” and that depends almost entirely on consumer spending is a piss poor economy. Obama is not trying to restructure a new economy, he is trying to restart the same old economy that failed. We have been spending more than we have been earning, consuming more than producing, and doing these as if there would never be any bill to pay. Well, the bill has arrived and Obama doesn’t want us to have to pay it. He wants to create more credit and more money, and restart the same process as if it won’t fail next time. He is restructuring everything else in our nation and merely tinkering with our failed economic model.

Don’t worry about another failure, though, because I don’t think there is a snowball’s chance in hell that he will get it restarted. To repeat his own words (emphasis mine),
And with so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or even to each other.

His solution to restart lending is to simply pump more money into the banks. We’ve already done that and they didn’t start lending. Of course they didn’t; did he not hear his own “with so much debt” part? Who are they going to lend it to?

Are they going to lend to the people with bad mortgages who are in the process of restructuring those mortgages or simply defaulting on them? To the five million people who are drawing unemployment benefits, or the millions more who are not working but who don’t qualify for benefits?

Maybe they will lend it to Ford, GM or Chrysler? Or to all of the other businesses as badly underwater as those are? Or to manufacturers who don’t want loans for new equipment because the equipment they have is already running at 50% of capacity and dropping?

So with more cash the banks will lend money to each other? Oh, great.

He’s got a grip on helping the “people who, through no fault of their own, owe more on their homes than those homes are worth.” Oh, good, 0.01% of the economic crisis has been solved.

BJ over at Newshoggers is saying what I’ve been saying since the mortgage default issue first became a big economic crisis.
In any case, if you want to start laying blame, take a close look at just what those “toxic assets” everybody is looking to offload are. They aren’t mortgages, because mortgages, even those in default, are easy enough to value. What they are, are derivatives and securitizations of the mortgages and other loans, often enough several times removed from the actual mortgage. Oddly enough, trying to determine the value of securities so far removed from the initial loans that you don’t even know what loans you’re covering turns out to be a lot more difficult than the wizards of Wall Street thought it would be.

If I own a paper that contains 20% of someone’s mortgage, how do I know that maybe a hundred or so other people don’t also own 20% of that same mortgage? Maybe only four others own 20% each, but the point is I don’t know, and therefor I cannot accurately place a value on my piece of paper. It is now a “toxic asset” and worth only what someone is willing to pay me for it, probably zero.

And when I buy “insurance” on my assets from a guy that is, in fact, a scammer selling bogus paper based on money he doesn’t have, how much are any of my insured assets worth once it becomes know that they are not insured. They also now are “toxic assets.”

Pay off those mortgages and what happens to those toxic assets? Right, they are still toxic because the cat is out of the bag and isn’t going back in. So helping those homeowners is all well and good, certainly it’s popular, but it does nothing toward solving our economic crisis.

JFK said that we chose to go to the moon not because it was easy, but specifically because it was hard and America does hard things. Obama has adopted that same theme, that we do that which is difficult because it is our nature to do so, and I applaud him for that. He applies that to the health care issue, to changing the way we use energy and to the way we educate our young people.

He still wants to fix our economy the easy way.

1 comment:

  1. Anonymous11:41 AM

    What you call the "easy" way to fix our economy doesn't seem that easy to me; as in, if it won't actually FIX the economy, it wasn't the "easy way to fix" it. Besides, what you seem to want is precisely to NOT "fix our economy", but replace it with a BETTER economy. A commendable, and eminently moral, idea -- but will people go for it? As in, will they go for an economy not predicated on consumption who's main point is to relieve over-production?