We’ve all heard about the connection between H’wood and DC and heard the endless jokes (“Washington is Hollywood for ugly people”… badda-bing, badda-boom), but being in the nation’s capital for a few days on my book promo tour, I have been struck by a more disturbing parallel: William Goldman’s famous apothegm about the movie business – “Nobody knows anything” – seems to apply equal well to our government. And that’s all well and good for H’wood (it’s only entertainment, after all), but this is the fate of our nation – even the world. Sad to say but…
“No one knows anything” about the trillion-dollar stimulus plan. Now that’s scary.
A kind of depressed panic – if that makes sense – seems to have overtaken this city. Not a person I have met seems to have confidence in anything, except that everything is a mess. I haven’t heard one word about “Hope” and “Change” around here, but it may be I’ve been talking to the wrong people. To be honest, I hope that’s true.
Every day we learn about another “Easter egg” in that stimulus bill. Today, it is turning back welfare reform by creating a new incentive for welfare.
I think it is generally true that once you get beyond government’s irreducible reason for being – defense – there is confused and contentious groping about everything else. One more reason that limited government is best.
““No one knows anything” about the trillion-dollar stimulus plan. Now that’s scary.”
It is intrinsically impossible to clearly understand the stimulus plan. The most brilliant human beings who ever lived are incapable of doing so. We are often barely able to handle our own affairs. How can we possibly decide what is best for our neighbors who have their own particular abilities and needs? Common sense dictates that our elected officials in Washington, DC. will ultimately throw the tax payer’s money around like a bunch of drunken sailors. One simply cannot rationally spend this much money in such a short time.
Now besides the “Stimulous Package” the news that the FBI is closing in on Wall Street has got to have the whole town changing their pant’s quite often
to say the least. Will we have to build a new government house prison for all the theft they must be found guilty of or do we continue to allow them to
rob us blind. Where are the honest ones and how can we decipher who they are from what we heard and saw from most of the CEO’S in yesterday’s hearing. Washington is in deep D-D-,and they know it.
I just read your colleague, Claudia Rossette’s, piece about Benon Sevan and thought it’s a shame that nobody cares.
The suggestion that ‘nobody knows’, forecasts change, but not hope.
Meanwhile, the love affair continues…
So far, the President is more interested in finding blame than in leading. As things get worse, will that trend be accentuated or will it be reversed? Hopefully the latter.
All Roger’s readers should also read the Financial Times’ Martin Wolf, the world’s premier economics journmalist. Here he is on the bank bailout and why it will not work:
Why Obama’s new Tarp will fail to rescue the banks
By Martin Wolf
Published: February 10 2009 18:06 | Last updated: February 10 2009 18:06
Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.
Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.
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”.
The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.
Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.
If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.
The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.
By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.
“I haven’t heard one word about “Hope” and “Change” around here, but it may be I’ve been talking to the wrong people. To be honest, I hope that’s true.”
Didn’t I see Joe Wurzelbacher asking you for spare change so he could pay the back taxes he owes?
p.s., If Washington D.C. is Hollywood for ugly people, welcome home!
D.C. today is like old Hollywood. Make big pictures! Praise the Prez for passing a budget that’s big, never mind what’s in it. Then come the flops…
Roger-
Nothing that is being done is not something that Obama and his crowd did not promise. It will become much worse. And in the fear and uncertainty of a complete economic breakdown and active foreign pressure, we will lose our precious freedoms.
We definitely live in interesting times. Hold on for Mr. Toad’s ride.
Common sense dictates that our elected officials in Washington, DC. will ultimately throw the tax payer’s money around like a bunch of drunken sailors.
You’re seriously insulting sailors (drunken or otherwise) by comparing them to members of Congress.
And when Obama admitted he was trying to redistribute wealth, the wraith of the MSM and the Dems was placed on the person who asked the One about his tax and spending plans being wealth distribution.
We have 1 trillion for the first TARP, 1 trillion for the Obama/Pelosi/Reid spending bill, and another 2 to 3 trillion for another ‘bank bailout’(which details are unknown, but ‘we need it now’ and the details will be filled in later). We are getting S*****D by Obama and the Dems, yet there are people supporting this POS because if they work, they’ll be getting at least $8 buck back per paycheck.
Judd Gregg has had the good sense to withdraw his nomination for Commerce. I think the census action was the last straw. Every good man gets to make one mistake and retract it.
We are a long way from a safe harbor but this is one small land bird that is welcome.
The stimulus is a wholesale money grab by the Dems, one of the biggest heists in history. If it were not, the bill would be open to public scrutiny and the pace to enact it would be deliberate. This is nothing less than theft and Obama is a criminal.
The sad thing is that all of this was–or could have been–foretold. No evidence exits to prove that Obama is anything but a marxist radical.
Nobody knows anything because we have given politicians the power to dictate economic policy without their having to understand any economics beyond their own self-interest. They are also fully taking advantage of the moral hazard involved–they get to play with other people’s money and buy votes and more power with it. Professional politicians have wised up to that fatal flaw in our governmental system and are bilking it to the hilt until it crashes. We are now at the mercy of such politicians, instead of being the beneficiaries of generations of true statesmen.