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.
