Wednesday, February 11, 2009

Economy and Politics

Martin Wolfe’s dire commentary in Financial Times about Geithner’s proposal (or lack thereof) is resonating all over the place. His assertion is Obama and Geithner are refusing to accept that American banks are insolvent and need huge dose of capitalization. Wolfe and the gang (JJ Cramer belongs there too) think that basically Uncle Sam needs to give money to banks which will allow these banks to write off huge losses in CDOs at prices which market is reflecting correctly at present.

The implicit to this argument is Obama Administration is essentially becoming a ‘chicken’ in asking more money to Congress as everyone knows by now that the true bill is in Trillions. Obama has made this call that ‘politically’ it is impossible to pour more money than remaining part of TARP.

Who can challenge Obama’s political acumen in today’s world? He determines that politically not feasible to do any further (even if there were 60 Democratic senators); then it means it is impossible to go beyond that line at present.

Obama seems right here – American Public will simply not accept that they would pay more than $700 Billion at this juncture to Banks. Critics can argue that Obama is not crossing the ultimate leadership test – tell truth to people even when it is harsh. But the question is, are these critics themselves been able to articulate their case probably? And indeed where do we get money beyond what is committed so far?

Why wouldn’t a politician attempting to guard public interests not fight for a stimulus package of the same size when money pot is limited? Yes, this is risky and what Wolfe calls based on optimism unwarranted by reality. So are these critics arguing here that if Uncle Sam writes 1 Trillion more to these banks, the risk is reduced and pain is less? These same critics will be first to sink Treasury Bonds saying Uncle Sam can not sustain the high debt.

So the real criticism for Obama plans is it is not effectively addressing the inherent contradiction in all of these economic challenges – America’s problem are due to excessive debt (especially consumer) and to solve those, ironically debt increase is needed. The question is why Fiscal solution while increasing the debt and not direct capital injection in banks. Obama’s bet here is by jolting real American Economy by Fiscal Stimulus, his optimism in lesser bank intervention is justified (optimism that we will muddle through). The missing link here is Obama slowly needs to goad American consumer toward lesser debt without drastically reducing the actual money flow in the economy.

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