Page 1 of 5 OBAMA, CHANGE AND CHINA, Part 3 The New Deal dollar and the Obama dollar By Henry C K Liu This report is the third in a series. Part 1:
The song stays the same Part 2:
A dangerous balance
Much talk has been floating around comparing United States President Barack
Obama with president Franklin D Roosevelt and the yet-to-be-fully-developed -
or revealed - Obama recovery plan with the New Deal. So far, the differences
between the two leaders in crisis are more visible than the similarities.
Obama's US$787 billion stimulus package is viewed by many economists as too
small for the task and too diffused to tackle the immediate need of halting
layoffs and promoting new job
creation. The $275 billion home mortgage refinancing plan managed by newly
installed Treasury Secretary Tim Geithner is beset with complexity that few
seem to fully understand or know how to navigate.
The Obama 2010 budget, by trying to do too much on long-term problems such as
healthcare reform at a time of crisis, is being hectored by Democrat
congressional committee chairmen acting like independent political war lords.
The president's call for sacrifice by all is answered by a Democrat-controlled
Congress tacking on 8,000 legislative special interest earmarks to his $400
billion supplemental spending bill.
The bank bailout started by Republican Treasury secretary Henry Paulson is
stalled in paralysis with the Obama team, now led by Geithner, former head of
the New York Federal Reserve Bank, who had worked closely with Paulson and is
refusing to admit all-out nationalization while unable to push through a "good
bank - bad bank" arrangement to handle toxic assets to free up bank lending, or
simply letting zombie banks, such as Citi, fail by market forces.
The Geithner plan
The Geithner plan for banks is designed to clear away "toxic assets", mostly
complex instruments of structured finance (derivatives) that act as blood clogs
in the vital veins of US financial system when the credit markets froze up.
The diffused nature of these instruments and associated counterparty risks add
up to an unprecedented state of high anxiety and uncertainty in financial
markets as no market participant can reliably assign final values to these
assets not only because they may be worthless, but also because they imply
unknown counterparty liabilities of possibly consequential dimensions. Thus
these assets are toxic in the sense that they carry potential negative
liabilities beyond being worthless to threaten the financial survival of
institutions that hold them.
The banks and financial institutions that own these assets are caught by market
failure as buyers cannot be found at any price. To continue to hold such assets
at marked-to-market values will generate huge losses that grow by the day,
eventually leading to insolvency as the availability of new capital dries up,
leaving such institutions unable to meet their rising liabilities. Until banks
can clear such toxic assets off their books, they will not be in a position to
take on more risks by make new loans.
Geithner's plan involves government support of capital and finance to induce
private investors to take problem loans and toxic assets off the balance sheets
of banks.
The problem with the Geithner plan has a double edge. If successful, private
investors may reap a windfall profit by exploiting taxpayer capital and
finance. But the plan may fail because the Treasury's $1 trillion earmarked for
the plan may not be enough to clean up the banks balance sheets, at which point
the Treasury may have to go back to Congress for more money which Congress may
not be in the mood to grant if the amount needed threatens the bankruptcy of
the nation.
Obama wasting his first 100 days
With more than half of the crucial first 100 days in office spent, the Obama
administration is having difficulty continuing to project an image of confident
determination to turn the deepest global economic crisis of capitalism since
the Great Depression into a new era of progressive politics not only
domestically, but also a new world order of equity and justice.
Obama told the world during his presidential campaign that his presidency will
be one of consequence. In his inaugural address, he proclaimed: "There are some
who question the scale of our ambitions - who suggest that our system cannot
tolerate too many big plans ... What the cynics fail to understand is that the
ground has shifted beneath them ... The question we ask today is not whether
our government is too big or too small but whether it works."
Rahm Emanuel, Obama's chief of staff, famously said that a crisis is a terrible
thing to waste. A corollary is that government intervention is an even more
terrible thing to waste, which is something that the Obama team has yet to
realize.
Obama has the rare opportunity to reverse the Reagan revolution of smearing
government as always being the problem, never the solution. There is now a
growing general consensus that the abdication of government responsibility to
regulate free-market fundamentalism has been the root cause of the current
global economic crisis, and that the free-market solution adopted by Paulson
during the George W Bush administration in response to failed markets has been
in itself a failure.
Midway through his first 100 days, sensitive to criticism of his "tell it like
it is" warnings about the seriousness of the economic crisis, Obama shifted his
rhetoric to sound like his campaign opponent, John McCain claiming that the
economy is fundamentally sound, a line that sank the Herbert Hoover presidency
in the 1932 presidential election.
Very few people beside the diehard cheerleaders of free-market fundamentalism
at CNBC, can now honestly conclude from either economic data or personal
experience that the economy is fundamentally sound. By yielding to criticism
that his rhetoric was talking down the market, Obama is in danger of letting a
serious global crisis go to waste. An economy that is fundamentally sound needs
no fundamental structural reform, only an emergency treatment before returning
to business as usual.
Obama needs to understand that the market is not the economy. The market
operating through a price system is only a partial mirror of the economy. The
task at hand is to save an economy severely impaired by income stagnation.
Restoring with future tax revenue the price bubble of financial markets that
had been detached from the real economy is to mask the symptom while ignoring
the disease. Such an approach robs the market's ability to self-correct
imbalances and distortions caused by a dysfunctional monetary policy and
government abdication of responsible regulation.
Larry Summers, Obama's top economic advisor, is known as a strong defender of
free markets. In a predictable Faustian declaration, Summers explains: "The
view that the market economy is inherently self-stabilizing, always, has been
dealt a fatal blow ... This notion that the economy is self-stabilizing is
usually right, but it is wrong a few times a century and this is one of those
times."
The central ideological consequence of this fatal market failure, Summers says,
is that there "is a need for extraordinary public action at those times ... The
debate over whether you can love your country and hate your government has been
settled with a negative answer." Love of country is now congruent with love of
government, albeit smart government, which to Reaganites is an oxymoron.
Obama's new progressivism
Obama's new progressivism is based on the rehabilitation of government
intervention in a failed market economy, even as his top economist only accepts
the progressive battle cry as a temporary necessity. Even Obama himself has to
clarify publicly that he realizes that Americans do not envy or resent the rich
because even the American dream allows the poor to emulate the rich. But he
stops short of proposing an income policy even when it is obvious that income
disparity creates destabilizing imbalance between supply and demand. The
failure of government intervention from misuse, such as intervention to help
wayward financial institutions rather than victimized individuals, can turn the
US into a failed state and the economy into a failed market.
Rather than a national income policy to raise income for all, Obama chooses an
income redistribution path through raising taxes on the rich and cutting taxes
on the poor and the middle class, whose members are really the working poor
because of a decade of wage stagnation.
An income policy will relieve the working poor by guaranteeing every worker a
good living wage to be an effective consumer without unsustainable debt. After
all, it is a very American idea, which was first put into practice successfully
by Henry Ford. Thus far, the reality is that the American dream has turned into
a nightmare in which the poor emulate the rich by spending beyond their meager
means and taking on unsustainable debt, not by spending rising income.
Effective income parity does not aim at lowering the income of the rich, it
aims at raising the income of the poor.
While Summers is continuing Paulson's aim of saving free-market capitalism with
temporary transitional state capitalism, Obama's rhetoric until recently had
been couched in a far-reaching progressive agenda of reversing widening income
disparity and unsustainable wage/price imbalances that have left the world with
overcapacity caused by insufficient demand, which had to be masked by excessive
debt.
But Obama's March 12 speech before the Conference Board, a group representing
the interests of big business, was disappointing in that it made our
progressive reformer sound like just another garden variety "trickle down"
market fundamentalist. Obama's strategy of first putting out the raging
financial fires before dealing with long-term structural reform is
fundamentally flawed because the arsonist responsible for the raging fires is a
decades-long denial of the urgent need for fundamental structural reform. There
is an overwhelming prospect that if and when the raging fire is contained,
fundamental reform will give way to business-as-usual with a celebration of the
resilience of market fundamentalism. The prospect of recurring crises every
decade will continue.
Obama's initiatives blocked by centrists
Obama's three core progressive initiatives - universal education, universal
health care and energy/environment transformation - if implemented without
watered-down compromise, will be steps to restore US society to its true core
values, not just a new, improve American dream that bears little resemblance to
harsh reality.
Unfortunately, the Obama team is dominated by centrists who have now taken on
the battle standard of the failed alliance of neo-liberals in global economics
and neo-conservatives in global security. These centrists view their leader's
grand progressive agenda as merely a convenient temporary antidote of emergency
intensive care for a dysfunctional and unjust economic system and a militant
hegemonic foreign policy.
According to Summers: "It is periodically the task of progressives to,
ironically, save the market system from its own excesses." Centrists are
reformers who believe that slavery can be eliminated simply by paying
below-living wages.
The call by Summers, in his new post as chairman of the White House National
Economic Council, for international coordination of stimulus programs is being
rejected by his counterparts in the European Union. Disagreements between the
EU and the US over how to deal with the global recession is widening as EU
governments show little appetite for the US formula of piling up more public
debt to fight the collapse in output and jobs caused by excess private debt.
European social democrats are not on the same wavelength with the
pro-big-business, pro-market approach of Paulson/Summers/Geithner, as three
market fundamentalist musketeers, supported by Fed chairman Ben Bernanke as the
ever loyal D'Artignan.
To the Europeans, shifting private debt to public debt is not only self
deception, especially under a destructive regime of dollar hegemony, it is also
particularly dangerous if all sovereign debts are denominated in dollars that
EU central banks cannot print but have to earn through foreign trade.
Government stimulus packages are funded with future tax revenue. It is natural
that tax money is viewed by the paying public as funds that should be spent
within each country. Government bailout money to transnational financial
institutions is likely to be used globally. Every government is now engaged in
a race to maximize national multiplier effects of its stimulus programs. Thus
while all governments are paying lip service to resist protectionism against
movement of goods, few have faced up to the new form of financial protectionism
practiced by transnational institutions.
The transfer of funds from London to New York by Lehman Brothers during the
early hours of its bankruptcy filing is an example of the problem of financial
nationalism. Scores of hedge funds that had hundreds of millions of dollars in
cash and other securities parked with Lehman's prime brokerage operation in
London have had their accounts frozen and the funds transferred to New York,
leaving the United Kingdom with less money to settle the bankrupt firm's
liabilities.
A number of hedge funds filed formal objections with the New York bankruptcy
court and at least one fund, New York-based Bay Harbor Management, filed a
legal challenge to the court's hastily approved sale of Lehman's brokerage arm
to Barclays Capital.
A subsequent and even more troubling scenario arose from legal disputes on the
estimated $1 trillion in market value exposure of derivatives transactions that
Lehman had entered into on behalf of itself and its customers. At least three
lawsuits are known to have been filed alleging that nearly $600 million in
collateral posted by
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