Thursday, February 05, 2009

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?

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