Monday, March 9, 2009

Bank Shots

Some tell me that there's no point in being annoyed that President Obama, who decried distractions like "lipstick on a pig" during last year's campaign, is quite willing to fuel a distraction about whether Rush Limbaugh is the de facto leader of the Republican Party. All politicians do this, these people say correctly. Republicans have made great hay, for example, out of setting up filmmaker Michael Moore as a figurehead for the Democratic Party or at least its liberal wing, even though he holds no elected office.

The point, however, is that usually presidents and their chiefs of staff and their press spokesmen do not usually get involved in this sort of thing personally. At least not after they get into office. But over the weekend the Sunday news programs were duly preoccupied with the whole Limbaugh thing. This did not entirely crowd out discussion of the economic situation, but it did cut into it.

The fact is that, of all the initiatives and announcements that have poured out of the new administration, the one that is conspicuously missing is a strategy for the credit system. And if you polled all people who pay close attention to the economy and asked them, if the administration could work on only one single problem right now, at the top of the list would be the banks. If I were a conspiracy theorist, I might even start thinking that the lack of a plan or strategy was actually deliberate, to keep the atmosphere of crisis going so that there would be less political resistance to the administration's other initiatives. But more likely it's just that the banking problem is simply not easy to solve.

Why is the banking problem so important? Because if credit started flowing again, the economy's other problems would be a lot easier to solve and, indeed, might solve themselves. John McCain might have had a political tin ear when he insisted last autumn that the fundamentals of the American economy were sound, but he wasn't really wrong. This recession was largely a self-inflicted injury caused by a housing bubble that wiped out, or at least cast doubt on, a lot of loan paper when it burst. If banks would start lending again, jobs would not be at so much risk.So what's the solution? Political opinion seems to be divided between those who see giving more money to banks as the only solution and those who want to let banks fail. The former would essentially be throwing good money after bad, and the latter would be terribly disruptive to the economy.

One thing the government could do to spur the market to help solve the crisis is to eliminate capital gains tax, at least for those buying so-called toxic assets, thereby making it worth it to investors to sort through them to find the potentially profitable ones to buy. The administration, however, is doing the opposite. It is raising capital gains taxes. When an ABC reporter pointed out to Obama during the campaign that increases in the capital gains tax have always resulted in lower revenues, he seemed surprised but unruffled. It was still a good idea, he explained, because it would be "fairer."

Something else the government could do is to intervene and force large banks to sell off profitable parts of their business until only the most untenable parts remained. In other words, make them small enough to fail. It should be lost on no one that smaller, local banks generally are doing much better than the behemoths. There is a lesson here that should be reflected in policies and laws on mergers and acquisitions, going forward.

"Wall Street" may make a good whipping boy for the economy's troubles, but the president should not forget that he will need investors (a class that these days includes most Americans) to have confidence in his administration's policies if we are going to get out of this. The stock market reaction to each of his pronouncements (one dive after another) is certainly not definitive, but it's not exactly reassuring either. After months of talking down the market, first as a candidate and then as president, he belatedly tried to talk it up last week, advising people to invest with a long view. It did not help, however, that he based this on current "profit and earning ratios." As many business writers were only too eager to point out, he apparently meant price-to-earnings ratios, the common way to determine whether a company's share price reflects its actual value.

Like a number of things that Obama says, it sort of vaguely sounded right but, in strict terms of what the words actually meant, it didn't really make any sense.

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