Is Obama’s presidency doomed? The FT’s Martin Wolf thinks it might be.
Not because Tim Geithner had months to come up with his Grand Master Plan and still has no idea what he’s going to do, but because he and Obama still appear to be in denial about what the trouble is. By backing Geithner’s plan, Wolf thinks, Obama is hoping for the best instead of preparing for the worst. And he needs to do the latter.
Geithner’s non-plan is designed to fix a liquidity problem–a temporary market panic that has articificially reduced market prices for exotic assets. But we are almost certainly not having a liquidity problem. We are having an insolvency problem.
Specifically, the assets against which we have borrowed about $50 trillion are plummeting in price, wiping out much of the equity that once went to support the debt. THAT is what is killing our banks–not a lack of buyers for the crap assets the banks insist on carrying at dream values. THAT is what is killing our overleveraged consumers.
Until Obama and Geithner face up to that, Obama’s presidency probably will be a failure. And they had better do it soon. Because, as Wolf says, in another few weeks, everyone will have forgotten who got us into this mess.
Martin Wolf, FT: Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times…
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.
All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.
Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.
Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.
Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”.