Obama Has Picked the Wrong Hero for Our Times
Obama's America is a fractious, apprehensive country. There may be a freshly elected administration but, despite the new leader's vaunting rhetoric appealing to unity and reflecting the evident concern of ordinary Americans, the political and financial elite are reluctant to rally to a common cause. The ideological divides that have racked the US remain as entrenched as ever. Obama may be a champion of the importance of government, but he and the Democrats have a long battle to convert a political victory into an intellectual one. Yet almost every block in New York, like everywhere else in the US, has shops closing down as visible evidence of an ever deepening recession - and the need for wholesale change in the way the US is economically governed.
Last week should have been triumphant. The president won congressional agreement for his record near $800bn economic stimulus package, which, despite all the horse-trading, still contains enough worthwhile "shovel ready" infrastructure, energy and environmental spending to give the US economy a much-needed boost. Meanwhile, treasury secretary Tim Geithner signalled his intent to trigger up to $2.5 trillion in public and private spending to restore the US financial system to health - unfortunately he knew not how. This was the Big Beasts mobilising resources on a mega scale. In British terms, it was as if Alistair Darling had found £90bn on top of already record borrowing to boost the economy - and more than £200bn to address the British financial crisis.
Yet neither was received well, in part because the Obama team is ill adept at getting beyond the slogans - such as the need to create 3.5 million jobs - and explaining how and why. They need to. The familiar arguments in Britain about the prudence of huge borrowing are replayed here with even more passion. Fiscal conservatism is a creed adopted with religious fervour; a Washington conservative prayer breakfast is never complete without devotees invoking God to curb public spending, lower taxes and eliminate borrowing. Even the normally sane John McCain called the package "generational theft".
On the face of it, the numbers are scary; a budget deficit, including the spending on the banks, that will approach 14% of GDP in 2009/10. Such is the result of a toxic combination: Bush's outrageous legacy; the breaking of banks; and the need for the government to spend when the American consumer, unnerved by a collapsed property market and spreading gloom, is not. To build a bridge from here to where the US needs to be requires economic daring and a bold belief in the future. Obama is good - and he showed just what a formidable force he is when he took to the road to sell his economic package. But what is beginning to look doubtful is whether he can build around him a buttressing team who share the same passion and capacity as President Roosevelt had in similar economic circumstances. Obama has no equivalent of Roosevelt's two key lieutenants, Harry Hopkins, who led the fight for work, or Jesse Jones, who took on rebuilding the financial system.
Instead he is resolutely following his hero Abraham Lincoln, trying vainly to build a cabinet of all the talents. Apparently he gives every new cabinet member Doris Kearns Goodwin's biography of Lincoln, Team of Rivals. But Lincoln had a majestic moral cause - the abolition of slavery - before which even political rivals buried their differences. There is a great cause now, but for conservatives, the moral threat of Big Government exceeds even that of capitalism. Obama has to challenge them rather than charm them. And he needs some can-do allies. An indicator of the dangers he runs came last week when a Republican nominee he had named for commerce secretary, Senator Judd Gregg, captured the headlines when he suddenly withdrew his nomination. Gregg explained that he could not work alongside colleagues committed to spending, tax cuts and consequential borrowing that he considered entirely wrong.
It is this incapacity to trump the voodoo belief systems that have laid the US and world so low that is so dismaying and dispiriting. We are living through nothing less than the disintegration of the global financial system, shattering the western banking systems' capacity to lend. The risk is growing of a worldwide debt deflation. The west's governments have no choice but to put their balance sheets behind their broken banks and to make good the consumer demand that is no longer there via fiscal policy. They may even collectively have to print money, much more effectively done together than separately. Yet conservatives deny these truths.
The acute problem is that, although the old order and ideas do not work, there is no consensus on what the new order and ideas will be. The lack of coherence is plaguing these early weeks of Obama's drive for economic recovery. Thus Geithner's disappointing speech last Tuesday setting out the next steps in his financial recovery programme, and then stone-walling the senate budget committee the following day. The administration wants to act decisively along the same lines as Sweden in the early 1990s in putting its banking system back on its feet. But it hesitates to nationalise banks as Sweden did. And it hesitates to commit what could be 14% of American GDP in creating a "bad bank" to take over crippling toxic debt as the Swedes did. It wants the same ends, but cheaper - an intellectual challenge too far.
Geithner's solution is to enlist the private sector but even in partnership with the government, the trouble is that there is no way any scheme can buy bad loans and toxic assets for any one bank without negotiating their price. The resulting valuation will become a benchmark for all banks, and thus reveal the potential total losses for the overall system. These are stunning. The IMF says they could be $2.2 trillion; New York University's Professor Nouriel Roubini, whose forecasts of the extent of the crisis have proved accurate so far, last week released figures suggesting that, assuming another 20% fall in house prices, the number could be as high $3.5 trillion. He declared that the "US banking system is effectively insolvent".
But when the property market recovers, the losses will recede. In Sweden the government's "bad bank" recovered almost all the losses as the economy improved. The same would happen in the US. To get on that virtuous circle the banks have to start lending again - but they won't and can't when they are engulfed with bad debts. The government has got to bite the bullet and either insure up to $3.5 trillion of bad debt; or establish a "bad bank" to hold it; or some combination of both. And it will need to supply extra capital to banks that are particularly stricken. Whatever it does, the cost is much more expensive than the $150bn left over from the $700bn "Tarp" bank rescue plan established by George Bush and former US treasury secretary Hank Paulson in the autumn. Yet going back to congress to ask for more money on this scale is a political nightmare. Bankers are public enemy Number One.
American bankers, like their British counterparts, have been slow to get the message. The closure of the markets on which their business model depended is seen as an unpredictable act of God rather than the consequence of their abuse. And the argument that they need to pay high bonuses to retain talent is rightly mocked. What talent? The news that Merrill Lynch paid $1bn in bonuses despite record losses and a taxpayer bail-out has inflamed public opinion.
Buried in the 1,000-page recovery plan are measures to limit bonuses to one third of base pay, which, with the proposed $500,000 salary cap, is a swingeing assault on bank remuneration.
Bankers are in no position to complain. Their avarice and the scale of their business misjudgment have vastly complicated the politics of a bank bail-out, which will have to be on a stupefying scale to be effective. The open question is whether the US can afford to create a "bad bank" or equivalent that might cost up to 14% of GDP, on top of a budget deficit already of that same size. The answer is that it cannot afford not to do it. Otherwise it might suffer the same fate as Japan in the 1990s, whose refusal to accept the size of the problem meant that it temporised with half measures - and suffered a decade of economic stagnation.
This should have been the number-one agenda item on the G7 meeting of finance ministers in Rome this weekend. Geithner could have flown in with a coherent plan, rallied support for it and urged other countries to follow his lead. He has not and cannot. Nor will he meet other finance ministers who have worked up rescue models. Instead everyone is doing their own thing, typified by the British. We launched our asset protection scheme in January with no prior consultation with other governments. It is not a bad scheme, but unless governments act in concert they have no hope of success. Britain's once deep and broad money markets were the result of global capital inflows. They cannot be restored by the British government alone.
Yet the G7 is a cacophony of different plans and preoccupations. Everybody, including Gordon Brown, is looking for legitimation for short-term political advantage. It needs the Obama administration to cut through the cackle and impose an agenda equal to the scale of what needs to be done at home and abroad.
That inability is the gravest source of concern. There are signs that the Obama team is getting the message; it backed off the worst protectionist excesses in the Stimulus Bill, and both Obama and Geithner say we need decisive, large-scale action. The worry is that they will make too many concessions to the ideas and people who got us into this mess. Lincoln was a great man. But it is a Roosevelt America that the world needs now.
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