First published in the Telegraph on 30 April 2009
Barack Obama is a pretty superstitious guy. During the marathon presidential campaign, he made a routine of playing basketball on each of the various polling days, and carried with him a pocketful of lucky trinkets, including a poker chip and a small golden statue of the Monkey King. So one rather fears for his reaction to the inauspicious omens yesterday, on his 100th day in office.
As if the first US death from swine flu weren’t bad enough, the President had to contend with news that the economy slumped by an annual rate of 6.1 per cent in the first three months of the year – far more than most experts were expecting. Jeff Frankel, a leading institutional economist, declared that this is now the longest and sharpest slump since the Great Depression.
The banking system is still in crisis, house prices are in freefall and unemployment is climbing rapidly; those seeking out green shoots are likely to be disappointed, since the economy is hardly through the danger zone. The only consolation comes from the stock market, which is more or less flat since Obama took over, and the fact that most other economies are in a worse state. More worryingly, the new president has yet to convince us that he is more Franklin D Roosevelt than Herbert Hoover. Those of us who hoped that the new president would infuse genuine urgency into the rescue plan, for either the economy or the financial system, have been sorely disappointed. The language may be more sincere, the speeches more glamorous, but the response is still nowhere near bold enough. All the criticisms of the initial Bush “rescue” – that it nationalised the financial system’s losses while allowing the bankers to make off with the profits; that it failed to draw a line under the institutions’ previous failures – remain applicable to Obama’s scheme.
There are various arguments both for nationalising the struggling banks or for allowing them to collapse, but there are few convincing ones in favour of playing for time. And yet that is precisely what the Obama’s administration’s opening economic forays have amounted to. We remain stuck in financial no man’s land: the taxpayer has poured nearly $600 billion into the banks but they remain undercapitalised, on the basis of the losses they will soon incur.
Next week brings the results of the much-vaunted “stress tests” for US banks, whereby the big institutions will be told whether they need more cash to shore themselves against future losses. This would be well and good if there was really anyone out there who wanted to buy big dollops of banking stock – but given the state of the US economy, this seems fairly optimistic.
The problem-in-chief is the insidious interaction between the banking system and the economy, or more specifically the housing market. Every further percentage fall in house prices equals another chunk off the banks’ balance sheets, and another chunk of shareholder capital that will need to be thrown at the problem. And on the basis that the vast majority of extra cash will have to come from the taxpayer, why air the banks’ dirty linen so ferociously in public, rather than getting on with it in private, swiftly and discreetly?
The truth is that the Obama administration is gambling, lucky poker chip in hand. Timothy Geithner, the treasury secretary, and Larry Summers, White House economic adviser, are well aware that the banking system is undercapitalised – indeed, that if it had to write down all the losses it is facing, it would be effectively insolvent. But they are betting that by convincing investors and consumers that both the financial and economic crises are nearly over, they can swing the so-called feedback loop between the housing market and the financial system in the other direction: putting a floor under prices and helping banks recover.
They are likely to be disappointed, not least because their attempts to rescue homeowners have been so timid. In economics, the rule is to be harsh on borrowers in the upswing and to bomb them with kindness in the recession. Expensive as it is, the package Obama has put together for homeowners – as opposed to banks – is not generous enough. Foreclosures, the chief barometer for the US market, are soaring at an unprecedented rate; prices are still sliding. To make matters worse, banks are lending even less than they were early on in the crisis. And so the vicious circle continues.
The truth is that the way things are going this financial crisis is not even half-way over – as finance ministers admitted at last weekend’s conference in Washington, at least in private. Those who ran the London Marathon last Sunday know how it feels to pull yourself through the final miles. Now imagine having heaved yourself up the Mall, only to be told you have to do the course all over again. But that is precisely the plight for the financial system and the economy.
The housing bubble lasted far longer than anyone anticipated. So will the bust. And the problem is that the political and public will to stump up the cash to pay for it is fast depleting. George Bush had a shot at the crisis in his final year; Obama had another in his first 100 days. Both failed. Let us hope that in his second 100 days, the new president demonstrates far surer aim.