Obama, Let the Economy Shrink
Stay up to date with the latest headlines via email.
Obama's election is transformative, not just because of his race, but because of his ideology. This election represented a clear break with recent administrations for a whole lot of reasons. Since Ronald Reagan was elected in 1980, the United States has been led by presidents who are more concerned with the health of our corporations and our elites than with average Americans. Supporters of Bill Clinton may take offense, but it was Bill Clinton's administration that transformed the Democratic Party into a centrist organization highly dependent on big corporate campaign contributions. No, it is only with the election of Barack Obama that for the first time in a long time America has a president who genuinely cares more about average working Americans than about our biggest corporations' profits.
But there will be no long-term if Obama is not successful in getting us through the short-term. I have been one of the most pessimistic forecasters on the economy for a decade now. But for the first time it is looking as if my forecasts were too mild. The economic collapse that has enveloped the globe is going to be worse than anything I have predicted in my writings. In the last six months alone what was a housing and mortgage problem has spread to the entire global financial system, has infected the ability to get credit on all assets and businesses, and is now causing what I believe to be the worst economic downturn since the Great Depression.
The stock market in the United States, measured broadly by the S&P 500, has seen a decline from its peak of more than 50%. The Bush administration's reaction to the economic collapse has been poorly planned, sporadic and nearly criminal. It has bailed out some of America's largest institutions with taxpayer money without asking creditors to those companies to lose a single dollar of their capital. It has asked the Congress for $700 billion, supposedly to buy underwater mortgage assets from financial institutions, but turned right around and ended up suspending that program before it began and instead giving $250 billion to six of the largest financial institutions in the United States. How this was justified given the stated uses for the capital is impossible to understand. If institutions like J.P. Morgan were healthy, why were they given taxpayer funds? And if institutions like Citigroup were in trouble, why weren't we asking their executives to return hundreds of billions of dollars of bonuses they had received over the previous five years, or asking their creditors to take some financial hit before taxpayer funds were injected?
It is disappointing that Barack Obama came out in support of this $700 billion TARP bailout plan. To give him the benefit of the doubt, we can assume that he was told by the Bush administration, just like the rest of us were, that the financial markets would cease to operate if we didn't agree to give them this money. But simple economic analysis refutes the logic of this: buying distressed mortgage assets from financial institutions at a further loss doesn't help those institutions avoid yet further losses and insolvency. That the crisis worsened during the lame-duck period, after the election but before Obama was inaugurated or had named his economic advisers, is unfortunate. But the most disturbing aspect of the $700 billion TARP and the bailouts by the government of Fannie Mae, Freddie Mac, AIG and Bear Stearns, is that it all smells of business as usual right when we all have committed ourselves to change. From the perspective of American taxpayers, it is hard not to walk away with the impression that the same bad managements that got us into this mess are being rewarded for their ineptitude. Why would you reward the very companies that caused this crisis? Why would you think these completely inept management teams would be the ones to get us out of this mess? Unfortunately, the only answer I can come up with is that these are the very same companies that were the biggest contributors to our president and to our congressmen in their election campaigns.