Remember how, back when taxpayers were being asked to fork over hundreds of billions of dollars to bail out Wall Street, we were told it was essential to saving Main Street?
Well, in just a few months, we've gone from saving the banks in order to save the economy to just saving the banks. It's the opposite of mission creep.
In announcing his proposed "overhaul of the financial regulatory system," President Obama said, "Financial institutions have an obligation to themselves and to the public to manage risks carefully. And as president, I have a responsibility to ensure that our financial system works for the economy as a whole."
But parsing through his 85-page plan, it's not clear how these reforms will ensure that our financial system works for the economy as a whole.
"The Obama plan," writes Joe Nocera in the New York Times, "is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself." For Obama's plan to have any lasting value, says Nocera, "he is going to have to make some bankers mad."
We are already hearing the usual whining from the financial industry about too much regulation and the dampening of incentives. And we are already seeing a concerted push from the banking lobby to kneecap the newly proposed Consumer Financial Protection Agency. But, all in all, there is little there to make bankers mad.
I don't expect there will be too many on Wall Street unhappy with the massive loophole the new plan leaves by calling for so-called plain vanilla derivatives to be traded on an exchange but allowing customized derivatives -- which were at the heart of the financial meltdown -- to remain largely unregulated. This is very good news for the wheelers and dealers who helped turn Wall Street into a casino.
The larger problem continues to be the administration's habit of conflating the health of the Wall Street economy with the health of the real economy -- when, in fact, the two economies have become decoupled. The Dow may be up 30 percent since March, but the numbers that matter most to everyday Americans continue to tell a very different tale.
Unemployment, the single most important statistic when it comes to taking the temperature of the real economy, is at a 26-year high. Yes, the number of people filing continuing claims last week dropped for the first time since January, but the number of new people seeking unemployment benefits rose -- as did the number of people receiving benefits under the emergency federal program that extended benefits beyond the 26-week program offered by most states. All told, over 9 million people are getting some form of unemployment compensation. And most economists are expecting unemployment to continue to rise, hitting 10 percent -- some even say 11 percent -- by 2010.
Another indication of the troubled state of the real economy is the record high credit card default rates reported in May. The numbers are staggering. Bank of America's default rate hit 12.5 percent -- up from 10.4 percent in April. Citigroup wrote off over 1-out-of-10 of its credit card loans last month. American Express did the same. If the numbers stay around these levels, credit card issuers stand to lose over $70 billion this year. And it's worth noting that a number of the biggest banks are reporting default rates higher than the "worst-case scenario" numbers from the Treasury's recent stress tests. Tim Geithner's team might need to come up with some new terms: "worst-case -- and this time we really mean it -- scenario"; "even worse than worst-case scenario"; "can't imagine a worse case -- and believe us we tried -- scenario".
On the housing front, in May foreclosures dipped 6 percent from April -- but the 321,480 homes lost was still the third-highest total on record. May was the third consecutive month with over 300,000 foreclosed properties -- the first time that's happened since RealtyTrac began tracking foreclosure numbers. Nevada, California, and Florida were the hardest hit states. In Nevada, one out of every 64 homes received a foreclosure filing last month. Nationwide, one out of every 398 homes received a foreclosure note. That's a whole lot of people looking for some place to live.
And lending -- the increase of which was supposedly the primary reason for the bank bailout -- is also down. "If the banks aren't lending money," Jeffrey Rosen, deputy chairman of Lazard told me, "the economy can't get going." But, according to the Treasury's latest report on lending by the top 21 recipients of government money, consumer and commercial lending fell 7 percent in April -- with nearly 75 percent of the banks reporting a decline in loan originations.
Despite this gloomy picture of the real economy, the administration prefers to focus on the rising sense of consumer confidence -- even though this confidence hasn't translated to greater consumer spending.
"Everyone feels mildly better about where the economy is going," is how Joe Biden put it earlier this week. Perhaps the vice president needs to get out more. There are 9 million out-of-work workers, thousands of former credit card holders, and 321,480 newly homeless homeowners (and their families) who might say otherwise.
So the economic bubble continues to be deflated, but the rhetorical bubble is being pumped with plenty of hot air. Maybe we could use one of the many green shoots the administration is marveling at to pop it.
If the Wall Street economy is ever going to be recoupled with the real economy, we'll have to start by recoupling rhetoric with reality.