Fiscal Plan Fails both Markets and Taxpayers

Let's
be clear: President Barack Obama inherited an economy in freefall and
could not possibly have turned things around in the short time since
his election. Unfortunately, what he is doing is not enough.

The
real failings in the Obama recovery program lie not in the stimulus
package -- though it is too heavily weighted toward tax cuts, and much
of it merely offsets cutbacks by states -- but in its efforts to revive
financial markets. America's failures provide important lessons to
countries around the world that are or will be facing increasing
problems with their banks:

• Delaying
  bank restructuring is costly, in terms of both the eventual bailout
  costs and the damage to the overall economy in the interim.
• Governments
  do not like to admit the full costs of the problem, so they give the
  banking system just enough to survive, but not enough to return it to
  health.

• Confidence
  is important, but it must rest on sound fundamentals. Policies must not
  be based on the fiction that good loans were made, and that the
  business acumen of financial-market leaders and regulators will be
  validated once confidence is restored.
• Bankers
  can be expected to act in their self-interest on the basis of
  incentives. Perverse incentives fueled excessive risk-taking, and banks
  that are near collapse but are too big to fail will engage in even more
  of it. Knowing that the government will pick up the pieces if
  necessary, they will postpone resolving mortgages and pay out billions
  in bonuses and dividends.
• Socializing
  losses while privatizing gains is more worrisome than the consequences
  of nationalizing banks. American taxpayers are getting an increasingly
  bad deal. In the first round of cash infusions, they got about 67 cents
  in assets for every dollar they gave (though the assets were almost
  surely overvalued, and quickly fell in value). But in the recent cash
  infusions, it is estimated that Americans are getting 25 cents, or
  less, for every dollar. Bad terms mean a large national debt in the
  future.
• Don't confuse
  saving bankers and shareholders with saving banks. America could have
  saved its banks, but let the shareholders go, for far less than it has
  spent.
• Trickle-down
  economics almost never works. Throwing money at the banks hasn't helped
  homeowners: foreclosures continue to increase. Letting AIG fail might
  have hurt some systemically important institutions, but dealing with
  that would have been better than to gamble upwards of $150 billion and
  hope that some of it might stick where it is important. One of the
  reasons we may be getting bad terms is that if we got fair value for
  our money, we would by now be the dominant shareholder in at least one
  of the major banks.
• Lack of
  transparency got America's financial system into this trouble. Lack of
  transparency will not get it out. The Obama administration is promising
  to pick up losses to persuade hedge funds and other private investors
  to buy out banks' bad assets. But this will not establish ''market
  prices,'' as the administration claims. Banks' losses have already
  occurred, and their gains must now come at taxpayers' expense. Bringing
  in hedge funds as third parties will simply increase the cost.
• Better to be
  forward looking than backward looking, focusing on reducing the risk of
  new loans and ensuring that funds create new lending capacity.

There
is no ''mystique'' in finance: The era of believing that something can
be created out of nothing should be over. Short-sighted responses by
politicians -- who hope to get by with a deal that is small enough to
please taxpayers and large enough to please the banks -- will merely
prolong the problem.

An impasse is looming. More money will be
needed, but Americans are in no mood to provide it -- certainly not on
the terms that we have seen The well of money may be running dry, and
so, too, may be America's legendary optimism and hope.