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!