'The Worst Recession for Over 100 Years'

If this is the case, why aren't governments around the world responding more forcefully to this crisis?

In any case, this is the assessment of Ed Balls, longtime top economic adviser and closest ally of British Prime Minister Gordon Brown, made at a Labour conference in Yorkshire. He was talking about both, the British and the global recession:

The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years, as it will turn out. [...]

The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10 and even the next 15 years. [...]

These are seismic events that are going to change the political landscape. I think this is a financial crisis more extreme and more serious than that of the 1930s, and we all remember how the politics of that era were shaped by the economy.

If the Obama administration had made this kind of assessment, its strategy for dealing with this crisis surely would have been more ambitious and hence more adequate.

If you believe James Galbraith, the US stimulus will only work if the bailout succeeds at getting credit flowing again, which is pretty unlikely, given that the Obama administration, just like the Bush administration before it, still seems to be determined not to confront some of the core problems characterizing this crisis.

Obama's Strategic Failure

This could be the beginning of the end.

Last Friday, Obama tried to pressure Congress by warning:

It is inexcusable and irresponsible for any of us to get bogged down in distraction, delay or politics as usual, while millions of Americans are being put out of work. Now is the time for Congress to act. It’s time to pass an Economic Recovery and Reinvestment Plan to get our economy moving.

Yet arguably, this is precisely what Obama and his administration have done: They waited too long, failed to define the debate, and made unnecessary preemptive concessions. The result is too little, too late, and mostly wrong. In the worst case, this will not only fail to stimulate the economy, but might also lead to a weakening of the Democratic majority in 2010 and to Obama's premature exit in 2012.

As Paul Krugman points out in his latest column, 'The Destructive Center,' it was the failure of Obama's political strategy that led to the failure of his economic strategy, which the next few years are all too likely to most painfully confirm.

Shock and Awe!?

Is the eloquently and frequently promised 'swift and bold' action turning into 'too little, too late, and mostly wrong'? This worst-case scenario could come true. TARP was and remains fundamentally flawed, and the Economic Recovery and Reinvestment Plan (ERRP) does not look much better.

The stakes could hardly be higher. In order to have any chance of actually working, the stimulus needs to be huge (better to err on the too big rather than on the too small side under these conditions, as even Larry Summers now recognizes), very fast-acting and on target.

On Wednesday, Obama warned:

A failure to act, and act now, will turn crisis into a catastrophe and guarantee a longer recession, a less robust recovery, and a more uncertain future.

In his February 4 post, 'Shock and oy,' Paul Krugman again is pretty scathing in his critique of both the bailout and the stimulus. He quotes Martin Wolf, associate editor and chief economics commentator of the Financial Times:

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.

Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.

…

Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”.

Krugman elaborates:

You know, it was widely expected that Obama would have a stimulus plan ready to pass Congress even before his inauguration. That didn’t happen. We were told that this was because the economic team was working flat out on the financial rescue.

In fact, when it comes to bank rescue it’s hard to see much evidence that anything was accomplished during all that time; the team is still — still! — running ideas up the flagpole to see if anyone salutes. And the ideas look remarkably bad.

On the 'bad bank' approach, Krugman refers to the critique of Yves Smith, who blogs at naked capitalism. Here is what he had to say about this proposal in yesterday's post, 'The Bad Bank Assets Proposal: Even Worse Than You Imagined:'

Dear God, let's just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.

The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:

1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs

2. Has key elements that studies of financial crises have recommended against

3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

In a previous post, criticizing David Broder's talk about stimulus, draws a crucial distinction between Democrat. The 'best ideas' do not come from both parties:

But the part that really got me was Broder saying that we need “the best ideas from both parties.”

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground.

As noted many times before, this is the whole problem with centrism, aka 'pragmatism' today. The verdict is out: Neoliberalism has failed.

What has happened to the promise of competently executed change? What are the strategic implications of this impending disaster? TARP II continues the fundamental flaws and hence failure of TARP I and ERRP is too small, ill-focused, and might already be too late. Why does Obama still not govern as if he had won?

This reminds of former German chancellor Gerhard Schroeder's slogan when he came to power in 1998 with the help of the Green Party to not do everything differently but many things better. The US and the world desperately need Obama not only to do things very differently but also much better than his predecessor (which shouldn't be too difficult). So far, however, it is very disappointing. There is much more continuity than change, both in the inadequacy of the policies and the incompetence with which they are being carried out.

If this is not the moment to exercise audacious strategic leadership, I don't when it might be. What is the Obama administration waiting for?

'Make Him Do It' - But How?

In 'Moving the Political Center,' David Sirota, along with many other left-liberal progressives, argues that congressional Democrats should emulate their Republican colleagues under Bush, and start every policy initiative or modification from as far to the political left as possible. He gives some examples of successful progressive measures concerning the recovery package.

Unfortunately, he does not explore this further, for it is a central strategic question. For example, how could progressives systematically use the Overton window to shift public discourse and opinion even further to the left? More fundamentally, how best to articulate the relationship between progressives and members of Congress, so that the former can exert maximum influence on the latter? How do progressives need to build power in order to achieve that goal?

Trying to gain 'strength in numbers' is often insufficient and can even be misleading. For instance, the Congressional Progressive Caucus (CPC) is the biggest caucus in the House, and with 71 members represents about a third of the House Democratic Caucus. Yet it can't point to a single accomplishment on its website. The same is the case for state Houses around the country.

Clearly, simply electing more progressives, even if they are 'genuine,' is not enough. Progressives have to find a way to hold them consistently accountable, and to nudge them to the left.

Are We All Lemons Now?

'Lemon socialism' - it's the oldest political game in town: You privatize benefits and socialize costs.

In his post 'Bad' of January 29, Paul Krugman tells a joke about a very serious matter, which rings all too true:

As the Obama administration apparently prepares to launch Hankie Pankie II — buying troubled assets from banks at prices higher than they will fetch on the open market — it occurred to me that an updated version of an old Communist-era joke may be appropriate: under Bush, financial policy consisted of Wall Street types cutting sweet deals, at taxpayer expense, for Wall Street types. Under Obama, it’s precisely the reverse.

Update: Maybe I was too cryptic. The original joke was, “Capitalism is the exploitation of man by man. Socialism is the reverse.”

His initial impression seems to be confirmed. In his latest column, 'Bailouts for Bunglers,' he now gives what might be the best short description of Obama's approach to the second half of the bailout:

Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government — but the president says some very harsh things about you before forking over the cash.

More than a week ago, Robert Reich made the same argument in his post, 'How America Embraced Lemon Socialism.'

So if, by many accounts, Obama has shown some smart progressive leadership on the stimulus & recovery package - though the full extent of which still remains to be seen - why this centrist caving on the second half of th bailout? Is there a larger political strategy behind this?

In any case, since we are now in the midst of lemon socialism, might as well do the real thing, and do it right, because that might be the only adequate response: The nationalisation of quite a number of banks. But of course the question again will be an quintessentially political one: Who gets what, when and how?