Great Speech, Obama! But Still Wrong About The Problem

I can't say enough about the joy of having a sharp, articulate, and charming president lead this country through this crisis. Every time I watch Obama speak, my confidence is restored.

That said, I wish Obama didn't spend so much time hanging out with Tim Geithner and Larry Summers, who I assume are responsible for the mistakes Obama continues to make in his diagnosis and treatment of the banking problem.

Let's go to today's speech:

No one really knew what the actual value of [the mortgage-backed securities that the banks were making and buying during the housing boom was], but since the housing market was booming and prices were rising, banks and investors kept buying and selling them, always passing off the risk to someone else for a greater profit without having to take any of the responsibility. [TRUE] Banks took on more debt than they could handle. [TRUE] The government-chartered companies Fannie Mae and Freddie Mac, whose traditional mandate was to help support traditional mortgages, decided to get in on the action by buying and holding billions of dollars of these securities. AIG, the biggest insurer in the world, decided to make profits by selling billions of dollars of complicated financial instruments that supposedly insured these securities. Everybody was making record profits - except the wealth created was real only on paper. And as the bubble grew, there was almost no accountability or oversight from anyone in Washington. [TRUE]

Then the housing bubble burst. Home prices fell. People began defaulting on their subprime mortgages. The value of all those loans and securities plummeted. Banks and investors couldn't find anyone to buy them. [TRUE, BUT WITH AN IMPORTANT QUALIFIER..."at the price banks wanted to sell them." This is the whole problem in a nutshell. The banks can't sell the assets at prices the market is willing to pay, because then they'll be bankrupt. Thus, this whole canard about how prices are artificially low--a canard that Obama is unfortunately buying into. ] Greed gave way to fear. Investors pulled their money out of the market. Large financial institutions that didn't have enough money on hand to pay off all their obligations collapsed. Other banks held on tight to the money they did have and simply stopped lending. [NOT TRUE. BANKS HAVE SLOWED LENDING AND TIGHTENED LENDING STANDARDS, BUT THEY HAVEN'T STOPPED LENDING]

This is when the crisis spread from Wall Street to Main Street. After all, the ability to get a loan is how you finance the purchase of everything from a home to a car to a college education. It's how stores stock their shelves, farms buy equipment, and businesses make payroll. So when banks stopped lending money, businesses started laying off workers. When laid off workers had less money to spend, businesses were forced to lay off even more workers. When people couldn't get car loans, a bad situation at the auto companies became even worse. When people couldn't get home loans, the crisis in the housing market only deepened. Because the infected securities were being traded worldwide and other nations also had weak regulations, this recession soon became global. And when other nations can't afford to buy our goods, it slows our economy even further. [TRUE]

...[T]he recovery plan has been the first step in confronting this economic crisis. The second step has been to heal our financial system so that credit is once again flowing to the businesses and families who rely on it.

The heart of this financial crisis is that too many banks and other financial institutions simply stopped lending money. In a climate of fear, banks were unable to replace their losses by raising new capital on their own, and they were unwilling to lend the money they did have because they were afraid that no one would pay it back. [TRUE] It is for this reason that the last administration used the Troubled Asset Relief Program, or TARP, to provide these banks with temporary financial assistance in order to get them lending again.

Now, I don't agree with some of the ways the TARP program was managed, but I do agree with the broader rationale that we must provide banks with the capital and the confidence necessary to start lending again. That is the purpose of the stress tests that will soon tell us how much additional capital will be needed to support lending at our largest banks [NO, THEY WON'T. WHY NOT? BECAUSE THE STRESS TESTS AREN'T STRESSFUL ENOUGH. THE UNEMPLOYMENT RATE IS ALREADY HIGHER THAN THE PEAK RATE ASSUMED IN THE STRESS TEST BASELINE SCENARIO]. Ideally, these needs will be met by private investors. But where this is not possible, and banks require substantial additional resources from the government, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.

Of course, there are some who argue that the government should stand back and simply let these banks fail - especially since in many cases it was their bad decisions that helped create the crisis in the first place. But whether we like it or not, history has repeatedly shown that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months - years of low growth, low job creation, and low investment that cost those nations far more than a course of bold, upfront action. And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks - "where's our bailout?," they ask - the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. [NO ONE IS ARGUING THAT THE GOVT SHOULD JUST "STAND BACK AND SIMPLY LET THE BANKS FAIL"--LIKE LEHMAN. WHAT THE NATIONALIZATION CROWD WANTS IS CONTROLLED RESTRUCTURING AND REPRIVATIZATION.]

On the other hand, there have been some who don't dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it [YES!]. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. [YES!] So let me be clear - the reason we have not taken this step has nothing to do with any ideological or political judgment we've made about government involvement in banks, and it's certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess. [YES, SHAREHOLDERS HAVE PAID A PRICE, BUT NOT BONDHOLDERS. THEY'VE BEEN 100% PROTECTED]

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. [STRONGLY DISAGREE WITH BOTH ARGUMENTS. FORCING BANKS TO WRITE DOWN THE BAD ASSETS AND THEN RESTRUCTURING THEM WOULD DEAL WITH THE PROBLEM QUICKLY AND FOR ALL TIME...AS OPPOSED TO THE CURRENT SOLUTION, WHICH DRAGS IT OUT. IF THE GOVT WOULD CONSIDER MAKING BONDHOLDERS PAY FOR THE WRITE-DOWNS, MEANWHILE, THE TAXPAYER WOULDN'T LOSE MUCH OF ANYTHING.] Governments should practice the same principle as doctors: first do no harm. So rest assured - we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities - the so-called toxic assets - that are also preventing our banks from lending money. [THE TOXIC ASSETS AREN'T THE ONLY REASON BANKS AREN'T LENDING. BANKS AREN'T LENDING BECAUSE ASSET PRICES ARE STILL DEPRECIATING AND CONSUMER CREDIT IS LOUSY. ALSO, THEY'VE LEARNED SOMETHING--THEY DON'T WANT TO REPEAT THE MISTAKES THAT GOT US INTO THIS MESS.]

I'm glad I voted for Obama, and I'd do it again. But I wish he would spend a few minutes listening to Paul Krugman, Joe Stiglitz, or any of the dozens of other folks who have a better handle on the problem.

See Also: The Doomsayers Inherit The Earth!

Comments

[paixa3]

Bravo Henry for the spot on blog. If the President or Paulson, Summers or Geithner open their mouths about this cocked up solution, I can only think: blah, blah, blah and walk away. I am finished with their heresay.

[kanester]

Thank you Mr. Blodget. Obama admin, see how easy it can be to face the truth?

[gardenkitty]

Me too, Mr. Blodget: I think the President is listening to the wrong people. Goldman Sachs alums are running the Treasury..­.into the ground. Obama's choices for financial staff, apart from Sheila Bair, are more of the same old same old.

And like you, I voted for Mr. Obama.

[TJCole]

What the President is doing is creating an American Royal Class..!

Those being the Bankers and Brokers and such, they must be served by both the government and we peasants and peons,serfs who must go pleadingly to them so as to capitalize our market finance our dreams inspirations, and put a value, (as low as possible, of course), on our sweat and dreams and toil...and charge the most usurious predatory rates keeping Americans in debt their entire lives and gouging any increase in their wages that might occur as an anomaly...­!

Think they tell you the President's tax cut will put on an average of $15.00 per week back in your nearly empty pockets, but our Lords the Banks are raising their interest rates on credit cards doubling them even so as to soak up way more than an additional $15.00 dollars, .....you see..? Do you get it now..?

That's just a small example of what yesterday's speech was all about, that we are a government of the banksters, by the banksters, and for the banksters.­...not the people...!

The fact that the Sermon on the Mount was spun so as to imply that Jesus would want us to first serve "the money changers" these corrupt banksters, only added to my disgust and disappoint­ment...

Isn't that a cute doggie...?

[peterg76]

It seems to me that the banks and rating agencies committed fraud. Now, I'll admit, I can't really prove that in any meaningful way, but shouldn't someone at least be investigating? Or how about offering immunity from criminal prosecution if they'll just stop holding the entire economy hostage while they extort money?

[paixa3]

Geebus, I keep writing the ACLU to get a staff to get evidence to indict Paulson particularly. Geithner and Summers should probably be there too.

I will even throw in a thousand dollars to support the staff to do this.

[dsws]

The one thing that actually matters in all this financial mess is limiting the effect of financial turmoil on the real economy. When firms go bankrupt and cause other firms to bankrupt, it destroys real productive capacity. We must bail out the bondholders as much as it takes to stop that kind of contagious financial distress and its contribution to job losses.

[paixa3]

whch bondholders are you referring?

[William1950]

so we must bail out the theives who knowingly ... caused this mess... who knowingly.­.. profitted by grossly over inflating the value of loans just so they could then make more by selling the loans..now we must bail them out?? I'm sorry, I just don't see it. personally I think they should go to jail, and if that is not an option then let them eat the worthless paper they now hold...

[sueno]

I am no economist.
but I find it really interesting to listen
to some of the same people who profited and put us in this mess.
I understand that many do not like the approaches being taken,
but this was "Bush's mess" and right up until the markets crashed
(mostly) everyone blogging here, was happy with life and Wall St.
Most everyone providing "info" on the current crisis, are out to save basically themselves-
I would like to see you (Blodget), Cramer, Krugman, Santelli, Kudlow, CNBC, FOX,
Scarborough, Rush, Cantor, Sanford , Palin, Jinal and who-ever is left,
all put into a room and lets see "just how smart all of you are!"
Cause right now, people are living in the streets, losing jobs, forced to leave school
and having to sign up for public assistance, many for the first time.
Let's "drop" all this "empty air" and "rhetoric" that people are spewing
and show the country concise plan.
I understand that there are "gaps" in Obama's plan, but given all the "hot air"
coming from people who profited, "its time to show me the money"!
Its time "to put up, or shut up"! and stop wasting time trying to make points
with "analysis" that is out to save, your "own" skin-

[ntmessage]

The reason that Nationalization costs the taxpayer much more is that they end up being on the hook twice. Once because that write off is a tax benefit from the taxpayer that everyone seems to ignore. Next, the length and cost of a mid to large bank like continental took over seven years to sell off at pennies keeping employed a huge number of people. This is where the taxpayer pays again.

So most logical folks would strongly agree with the president on the overall cost to the taxpayer.

[kanester]

I'm sorry ... where are your poll numbers that show most people would agree?

[ntmessage]

Polls? This is fact, not opinion! dude!

[sputly]

I have been in the commercial mortgage banking business in a fairly large midwest city for 20 years. The banks and life companies are making commercial real estate loans in our markets. They are now being more cautious and conservative in their loan underwriting. There were a lot of overly aggressive loans made over the past four of five years and that has stopped. Many of those loans that roll over in the future will have problems because borrowers will have to come up with equity to refinance. The thing is banks and other lenders ARE lending, they are just no longer doing stupid things. Property values have dropped and continue to drop and a lot of properties now have outstanding debt that is equal to or greater than the value of the real estate. That should not be the American tax payer's problem. That was a risk the lender (and borrower) took when they made the loan a few years ago.

[William1950]

and the banks such as yours and the one I bank with... will carry on when the fradulent players are allowed to fail... thank you.

[GunnyJ]

It's always easy to sit on the sideline and critique the game, but once in the game things are a little different. Has any President ever been under this much pressure to produce in less than his first 100 days in office? Let's see how this plays out for an administration who is trying to make something positive happen.
Sometime the player we think we need to get to the championship is not the player who get us there....

[kanester]

Nice thought, and in a stable environment, that would be great. Unfortunately, the economy is collapsing faster than the government's current efforts to save it. The Obama admin isn't being criticized (by me) for not doing anything ... it's being criticized for not doing the best things fast enough. And he knew what he was getting into. Just reality.

[William1950]

agreed that Obama was dealt a raw deal ... I like Obama and am very proud to have him as my president.­.. I still don't like the selection of his economic team and think the banks that made the bad loans and the traders that bought and sold that bad debt should have to pay for their wrongdoing­... let em go, there are other banks that have not participated in this fruad and they are more than capable of carring on... it's not about Obama... it's about doing the time for doing the crime.

[lkjon]

A better solution in your opinion...­.what about the opinion of someone who disagrees with you...Whic­h opinion is right...no one knows for sure...let­'s just pray the one the President is listening to is right...

[dobberdoss]

Henry, youve done it again, you have summed it up with the greatest of clarity and I am again impressed and glad to have you as a favourite blogger here on Huffpo.
Well done, and hopefully you have taught some of the "head in the sand" types that continue to blog here at Huffpo that even though you support Obama you dont have to agree with him and his so-called financial experts who are so behind the 8 ball on this and so blinded by their loyalty to the FED that they can't see the forest for the trees

[BonoVox]

The President is fond of using the nonsense phrase "the banks," as in "the banks aren't lending," "the banks are holding toxic assets" etc. This isn't a crisis of "the banks." Our two big banks in Minneapolis avoided the stupid side of banking (subprime loans) and have been making a lot of loans lately, particularly mortgage refinancing with these great 30-year fixed rates. There are plenty of banks across the country in good shape.

What the President really means by "the banks" is the big greedy idiots like Citi and Bank of America. THEY made huge short-term money through garbage products, not "the banks." And now THEY have toxic assets. I completely agree with the author's assertion that those banks--the big greedy idiots--need to write down the bad assets and restructure. Instead, Citi has become Obama's Terry Schiavo--the President keeps seeing life that just isn't there.

[Viper]

BofA was not involved in subprime..­. It bought Merril and that was at the request of the goivernment and Country Wide .. to save the system , just a Wells bought an insolvent bank also at the request of the government. BofA never asked for the first TARP it received.. It neded TARP after the government would not allow it d to back out of the Merril deal... becuase of the cost of such a failure after Lehmans crashed. Its not a Wallstreet operation.

And this long ago went [ast subprime mortages being the problem... . most foreclosures are now convention­al...

Regards

[Viper]

The Banks in general have not lowered lending. But 30% of loans, especially for busineses are not from banks but private funds,venture capital frims and international sources and they are not lending...

Regards

[William1950]

I will admit I am no economist.­.. I go by my gut feelings most of the time and so far they have served me well... my gut tells me that when criminals practice their occupatiion of crime that they should not be rewarded for it. my gut tells me that I have been robbed and my grandkids have been robbed. and my gut tells me that we are not handling this right. There are so many things that have contributed to this outcome it's true, bad practices and outright fruad, poor or no oversight and regulation, and the common "joe" thinking he could hop onto the bandwagon and make a buck even when he knew it was too easy... and at the same time nafta and free trade caused our manufacturing jobs to go away.. middle class income shrinking and costs rising... all this happened and today is the result of all that.
I think the banks should be allowed to fail.. I think any bailout should go to the people affected and let the funds "trickle up" for a change. I think we need to drastically alter our tax structure.
and last we need to fire Summers, Rubin and Geitner...

[dobberdoss]

your instincts are spot on!

[callforchange]

If the bailout money goes to the people, they will then spend it, that would help on the retail side, but will the people lend money to the small businesses to expand, or cover their payroll, or to buy their inventory? No people will not. They are not banks. Stupid idea. Small business need loans, consumers need car and home loans, that is the reason why we need banks.

[paixa3]

You are correct. Do some simple mathematics. If each usa HOUSEHOLD received 5000 usd, that cost would be less than the original 770 billion that Paulson/Shrub asked for.

[William1950]

gee thanks ... consumers do not need more debt. have you heard of the mortgage crisis? consumers need to learn to not borrow their way to prosperity­... small business does not need more debt... the most sucessful business' get that way not by borrowing but by being smart about how they spend. debt and the trading of debt and the encouragment of debt are the problem.

[Viper]

"The way the FDIC currently intervenes in small banks" This is the nationailzation you want.. well here is the results and the way it works.

The way the FDIC intervenes:

1) It has no staff who know how to run a bank. They audit, they dont manage.
2) It closes the bank. in 3 days its reopened after being sold at a bargain price to a larger bank. It then guarantees against future losses (not unlike AIG. LOL) The small nationalizations it has done bankrupted it very quickly and its on the "insurance" hook.
3) On anything larger , it subcontracts a bank to run the nationalized bank while it sells off the assets.
4) The largest nationalized bank was regional IndyMac.. nationalization lasted six month. Direct and indirect costs were 2/3s of the banks assets. 60% of the business was lost. Sold to 3 rich people , with shareholders, bondholders (think pension funds), large ddepositors losing everything (50% for large depositors­.. businesses­.. now out of business, employees w/o jobs).

5) Obviously the way the FDIC currently does not apply/will not work for large multinational banks. Based on the real cost today would cost about 15 trillion across the banking system. The FDIC is broke now, has more cost to handle on the 120 more small banks that will be nationalized this year.

So your entire argument is based around nationalization like the FDIC is doing... Which even Roubini says makes matters worse.

Regards
.

[paixa3]

I have to ask if you are including the payoff of any derivative instruments of any kind? NO derivative instruments should be covered in any manner, rather written off directly to the equity account. PERIOD. Not one red cent. Let the shareholders eat every cent of them.