Barack Obama and the cost of doing nothing

August 23, 2011

The German philosopher and political theorist Georg Wilhelm Friedrich Hegel (1770-1831) said that “All that is real is reasonable, and all that is reasonable is real.” Frederick Engels, the collaborator and supporter of Karl Marx, took this to imply that “the value of a social or political phenomenon is its transitoriness,” as Austin Lewis wrote in the introduction to “Feuerbach: the Roots of Socialist Philosophy” (1919) by Engels.

Wind the clock forward a century, closer to the early days of the Obama Administration — days of financial crisis and fear when Wall Street was “melting, melting” a la the wicked witch in the Wizard of Oz. Economist Larry Summers reportedly advised President Obama that time will heal the wounds of the financial markets and that no further action to restructure the big banks or the housing market is needed. The view of leaving the big banks alone is consistent with the line taken by Summers’ political sponsor, former Citigroup Chairman and Treasury Secretary Robert Rubin, who has served as the political protector of Wall Street in Washington for a quarter century.

Writing in The International Economy, “Angela’s Amateur Hour,” Klaus Engelen notes that Summers has criticized German chancellor Angela Merkel’s actions in the euro crisis by supporting the central bankers in Frankfurt, an explicit censure of the EU debate over whether to impose losses on bond holders of insolvent EU banks.

Said Summers: “The European Central Bank is right in its concern that punishing creditors for the sake of teaching lessons or building political support is reckless in a system that depends on confidence.” But can we build or maintain public confidence in markets or governments upon castles made of sand?

Both Marx and  Engels, as well as free market theorists, suggest that all things in politics and life change. The US economy in the post WWII period is certainly an example of this, with the demographic bulge we call the Baby Boom acting as a deterministic wave in terms of economic policy and financial market performance.

Yet somehow both Rubin, Summers and their minions, such as Treasury Secretary Timothy Geithner, seem to think that we can ignore these changes and simply continue along without making any fundamental fiscal and financial decisions — especially changes that will inconvenience them or their associates and clients on Wall Street.

But confidence based on mere rhetoric is an illusion. Confidence in the financial markets starts and ends with getting paid, with the ability of counterparties to perform on their obligations, of investors to value financial assets and consumers to purchase or sell homes. So while the arguments of Summers and others — that we should not reduce debt and compel the bond holders of the largest US banks to contribute to solving the problems in the banking and housing sectors may seem attractive today — they ultimately lead us down the road to long-term economic malaise and political instability.

The reason that Chancellor Merkel and her counterparts in the other EU nations have argued for requiring pain from at least some of the holders of bank debt is that there is no longer any choice. Most of the large banks in the EU are book insolvent as we define it in the US. With the ECB already purchasing the debt of member states in the open market and the EU’s ability to fund these operations limited to the printing press, Western European states are confronted with the grim task of restoring solvency to their banks and nation states by reducing debt.

“There isn’t any bailout big enough to rescue the third largest economy in the eurozone the way there was with Greece, Ireland, and Portugal,” notes Engelen with respect to the prospect of an Italian default. “Italy can only rescue itself.” Thus, with the endgame for Greece seemingly at hand, the next countries in question are Italy and Spain.

Both in the US and in the EU, politicians such as Barack Obama and Angela Merkel have been struggling to manage an economic problem that is problematic in political terms. The path of least resistance politically has been to temporize and talk. But by following the advice of Rubin and Summers, and avoiding tough decisions about banks and solvency, President Obama has only made the crisis more serious and steadily eroded public confidence. In political terms, Obama is morphing into Herbert Hoover, as I wrote in one of my first posts for Reuters.com, “In a new period of instability, Obama becomes Hoover.”

Whereas two or three years ago, a public-private approach to restructuring insolvent banks could have turned around the economic picture in relatively short order, today the cost to clean up the mess facing Merkel, Obama and other leaders of western European nations is far higher and the degree of unease among the public is growing. You may thank Larry Summers, Robert Rubin and the other members of the “do nothing” chorus around President Obama for this unfortunate outcome.

It is still not too late for our leaders to get ahead of the accumulating fear that eats away daily at public confidence in currencies and markets from Los Angeles to Berlin. But the first step to turning things around is to understand that doing nothing, as has been the strategy in both the US and EU since 2008, is no longer a viable strategy. When the public sees government and private institutions acting with purpose to address the core issue of solvency, then confidence will start to recover.

Comments

Let’s not insult Herbert Hoover, who had a real record of accomplishment before he took office. And while Hoover also listened to calls for austerity during HIS Depression, worsening it, he also established the powerful and effective Reconstruction Finance Corporation. The closest parallel to the RFC for Obama would be the predatory HAMP, which actually made matters worse for the trusting souls who enmeshed themselves in it.

No, a more correct parallel for Obama would be Warren G. Harding — a pretty face who fronted for corrupt interests and whose campaign slogan, “return to normalcy,” was quite similar to, and just as vacuous as, Obama’s calls for unity, hopey change, and so forth.

Posted by lambertstrether | Report as abusive
 

SCARE 20.12.2012
(Stop Corruption And Repression Effective 20.12.2012)

Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose.

That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened.

True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied.
In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on.

The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account.

This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over.

It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it.

Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution?

Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out.
Now, what demands are made if that scenario is to be avoided.

1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012.

2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012.

3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole.

When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.

Posted by linushuber | Report as abusive
 

“This represents a serious violation of the spirit of the Rule of Law that is the basis of western society.” I think this is the central point, that has been obscured for over a decade. In fact I place the starting point as President Ford’s pardon of Richard Nixon. It’s been downhill ever since. The most egregious instance has been President Obama’s, “We must look forward, not back.” This is the ultimate source of the malaise that is growing everywhere and slowly increasing as people slowly become aware of the many instances of fraud perpetrated by the super used car salesmen who head the TBTF institutions.

Posted by Acharn | Report as abusive
 

Basil O’bama sold his soul for the Health Care Bill at the cost of all other social maladies. His jobs program is perpetual emergency unemployment benefits. If you think the major benefits of health care reform are going to be realized by the masses then you are destined the pathetic disappointment of altruistic idealism. The health care reform bill was passed to benefit the insurance and health care industries. O’bama’s legacy will be that of “the ultimate sell-out” ..

Posted by Woltmann | Report as abusive
 

Warren Buffett is a parasite for this reason – he has based his being on his insurance business. His insurance business is secondary and parasitic. His main source of income is sucking the life out of people who make money. If he tells you any different he is lying to you.

Posted by Woltmann | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •