What Obama Must Do To Have Any Hope of Fixing the Economy

I voted for Obama.

I passionately want him to succeed in solving the economic crisis.

But before he can succeed, there is something he has to do.

Paul Krugman wrote an article yesterday hinting at the answer:

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions….

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly …. Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) …

Officials still aren’t willing to face the facts.

Geithner will never be willing to face the facts. Bernanke will never change his views. never change his discredited perspective. Similarly, Larry Summers, the head of Obama’s National Economic Council – the most powerful economic advisor on Obama’s team – will never change his ways.

They are too wedded to an overly-leveraged, highly-securitized, derivatives-based, bubble-blown financial system. They are too entrenched in outdated economic theories.

Democrats assume that Summers is a tried-and-true veteran, a big wheel during Clinton’s presidency, when the economy was booming. But that was before the things which Summers championed – unregulated derivatives, increased leverage, and repealing Glass-Steagal (the New Deal legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming “too big to fail”) – had any effect. Now that the fuse he lit has exploded, it should be obvious that he is part of the problem, not part of the solution.

Unless Obama replaces Geithner, Bernanke and Summers with people who get it, and who are willing to fix the things that really need fixing, Rush Limbaugh will get his wish: Obama will fail.

If Bernanke cannot be replaced in the middle of his term, he should at least be sidelined.

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