Desperate times call for drastic measures

Well, here we are again. I guess it must be foolishness, because shrewdness it is not. The Administration’s saga on economic recovery earnestness continues to show a lack of traction under the current regulatory parameters of the financial system. Last night’s 60 Minutes interview with Ben Bernake, the Fed Chairman, raises the stakes even higher and confirms our worst fears: Without a carefully constructed banking bailout, the success of the recovery and stimulus bill Congress just passed is zero to none.

This comes amidst the latest financial scandal from the corridors of Wall Street. Insurance giant AIG, which has received the largest government bailout in US history, has announced it will pay $165 million in bonuses from taxpayer bailout money as part of a total payout reportedly valued at $400 million. Needless to say, AIG’s last quarter earnings showed the biggest loss in US corporate history, which of course set the stock market on a downward spin for the first week of March. Adding to the fire, is that public trust in bailouts is beginning to erode, because there is nothing more damaging and harder to restore in an economic crisis, than public perception and trust, and this is turning to be Mr. Obama’s biggest and most lucrative headache.

Taxpayers are beginning to feel that the government is helpless in finding a way out of this capitalist jungle. But holding companies accountable is not flying with Wall Street, even as many of them keep accepting bailout money. Treasury Secretary Geithner seems to have underestimated the Amazonian arrogance of corporate America, as he could not find a way for AIG to reconsider the bonus payouts. The outrage has been coming from all fronts. New York Attorney General Andrew Cuomo has requested AIG to release the names and positions of the recipients of bonuses or face being subpoenaed.

Mr. Obama has to find a way to stop the foolishness and put his government into the driver’s seat. The bonuses represent a tiny symptomatic gesture of the total conceptual failure of his government to hand out money with no structurally sound accountability system in place. By this I mean, attaching legislation to bailout funds that would modify employees’ contracts to reflect the reality on the ground: That bonuses are to be paid if and only a company earns profit. Why is this Administration so scared of bending its muscles with Wall Street when they got us into this mess in the first place? AIG’s decision to pay bonuses will be the measuring stick of this Administration’s failure to act swiftly and boldly in correcting the capitalist renegades that refuse to play by the rules.

In the end, Mr. Obama should feel like he did everything he could to avert a second depression. He should start firing people in Wall Street; he should pass legislation that would put caps on financial instruments like CDS’s (credit default swaps), which are becoming the lethal protagonists of the current credit crisis in this saga of sagas; and finally he should start announcing plans for a banking rescue that would tie all the loose ends Wall Street giants are undoing with massive payouts and corporate gimmicks.

The Case for Nationalization

This has been a very difficult week for the Obama administration. The Geithner/Summers’ economic plan, mid-way from being implemented, has come under a half-sensical attack. On one side, Republicans have unitedly opposed it as a crazy spending spree with a socialist agenda, while a vast majority of economists, many now working for Team Obama, still think it is not enough to stimulate and grow the economy. Aside from a lack of bipartisan support in Washington, many economists and analysts now believe that the real cancer of this recession lies in the banking system, and if left to its own devices, it will burn through the recovery money like gambling junkies in a casino.

Take for instance the largest banks in the US: Wells Fargo, J. P. Morgan Chase, Citibank, Bank of America and HSBC. Economists and anyone out there in their right mind know that at this point, even if questions of fairness are raised at the notion that we are feeding the capitalist canker we are trying to eradicate, the government cannot allow these giants to fail. Why? Because the cost would be unthinkable and more damaging to consumers, investors, taxpayers and ultimately the American economy. So what is Obama to do? He should carefully consider plans to temporarily nationalize the banks, by breaking them into manageable sizes. By buying their toxic assets and controlling the freefall of their stocks and the increase in net-loss derivatives he can more easily restore lending. Capping CEO pay and re-establishing some regulations is a good start, but it is not enough to restore consumer confidence.

Last year, when the Bush administration bailed out the banks the first time, the purpose of the bailout was to free up credit and allow for banks to beef up their vaults. However, instead of taking the money to address their liquidity problems, they went out on a shopping spree. Wells Fargo acquired Wachovia, J.P. Morgan bought Washington Mutual and Bank of America seized Merrill Lynch. Is there something wrong with this picture? Absolutely. These bailouts left out the government’s conditions and specifications to interpretation. This time, the Obama administration has to be stricter. How about creating a banking czar? Republicans will never agree to this, even if they cannot put together one sound economic policy and present it to the American people. But the alternative is bleaker: throwing money at the banking industry without some strings attached can make Obama seem like an appeaser, not a reformer.

Even if the American people are willing to turn a cold shoulder to Republican criticism because of their lack of better and interesting ideas, time is of the essence if the Administration is to push for a bigger, bolder and desperately needed banking rescue. Unemployment is at a 25-year high, consumer spending has been at a record low, foreign investment has dried up, and confidence is running out in the financial markets. The American people should understand that the only way to erase these assets from the balance sheets is by buying up shares. At the end, the public should realize that they are the only ones that stand to gain.

The Opposition’s Tug of Rhetoric

Yesterday’s speech by President Obama, addressed to a joint session of Congress and clearly directed at the American people, was a sour reminder of the uphill battle our nation faces toward recovery and reform. Guilty of caution to an extreme, the President managed to sound hopeful to an increasingly politically incredulous crowd. But this is insular Washington, so in my book, he gets points just by standing up there and making his case for a better future.

However clear and optimistic Obama’s message might be, there is plenty of crumbling speed ahead of us. The economy is a disaster. Unemployment will keep rising to unprecedented levels as long as credit remains frozen in the rusty pipes of the financial sector. As much as half of this downward spiral is based on fear, and as long as the American people keep stumbling upon the opposition’s misplaced criticism of the Administration’s economic reforms, the long road to recovery will seem insurmountable.

The latent defeatism of the GOP has plunged to a new low and Governor Jindal (R-LA) has emerged as their spokesperson. It is without much contemplation that the members of his party are rallying against the recovery bill’s chance to jumpstart the economy. Their fodder? That government has no place in nation-building and recovery. Of course, there is substantial evidence against this rhetoric, but in the face of political annihilation much of this verbosity has translated into little persuasiveness precisely because the GOP, the party of fiscal responsibility, has contributed to the rampant deficit and the economic tsunami we have inherited.

What should be obvious in their impertinent argument is that when government is faced with a crisis such as this one, not doing enough can be costly. We see the consequences around the world. Economic crises can weaken the middle class, obstruct development and bring chaos. The world’s biggest middle class is now in trouble and much is at stake if government does not step in. This of course, is what Jindal’s party fundamentally opposes, and their solution is more of the same: taxcuts and a hands-off approach to basic universal problems like healthcare, energy independence and education reform. Fortunately, this crisis presents an opportunity for Obama’s government to try to fix some of the fundamental problems that got us here in the first place.

When 9/11 happened and Pres. Bush rallied us against his cause for war, much of the nation gave him the benefit of the doubt. It was not until six months later that we, the American public, realized we had evidently lost control and had stepped into the biggest foreign policy fiasco this nation has ever been confronted with still no end in sight. The least this Administration deserves is a fair attempt at improving the economy with a full front-attack. And let it be clear to Jindal and his party that after two wars, Katrina, the biggest deficit in US history and six straight unbalanced budgets, they have no moral grounds to lecture the Administration on how to go about fixing the problem.

Recovery Should Be Obama’s Bait

No doubt President Obama’s first days in office have been stressful. From faulty nominations to uncooperative deals, some say it's politics as usual. The media is busy dissecting all of this, highlighting, with some merit, his inexperience in back-channel negotiation tactics. But the truth is more profound. The economy and our livelihoods are in crisis and I think it’s time for Obama to put aside his gaily efforts to be bipartisan and focus on selling his recovery bill to the American people, which finally he will do this week, with or without the Republicans on board. Ultimately we, the taxpayers, will decide in favor of it.

Republicans have been doing a great job of making this American Recovery and Reinvestment Act (stimulus bill) sound like a wasteful spending spree. For Republicans, tax cuts should be the number one ingredient in the pot. Really? And what would John Doe do with a $1,200 tax cut? Go to Disneyland? Buy a flat screen TV set? If the average John Doe is like most of us, scared and reticent, he will cautiously put that money away or use it to pay up debt. This reasoning is what Republicans don’t understand. They want to jolt the economy back to life, to the unprecedented levels of profits and growth of the past 25 years so that corporate America can go back to their old ways of doing business.

Fortunately, Obama and his team can see through the smokescreen even if some of the details don’t yet add up. He has been saying it during the campaign. America needs to fundamentally change gears when it comes to spending, profiteering, and saving if we are to learn from the deepening mess we find ourselves in. He understands exactly how we got here: on credit and by lascivious risk-taking. Wall Street got greedier and rejected conservative and sound investment policies. Their complex schemes got the better of them and they developed glaucoma in their investment decisions. When the pressure set in and the losses started to compound, whose door did they knock on? You know the answer.

I understand the argument of some, that if we grow the size of government, things will get out of hand. It is true, overseeing the debt and spending of government takes a lot of work. It requires agencies working together in efficient, transparent and harmonious ways. However, if we are to avoid the past failed attempts at recession rescue plans, like Japan’s, we need a more comprehensive approach to spending. And this bill is offering exactly that. There is plenty of smart spending, which builds upon the realization that job recreation and long-term growth can come from government taking the initiative. How? By spending on infrastructure, education, research, science and technology, energy production, reforming our tax code, our trade agreements, specially investment regulations so that corporate and government financial transactions appear, at least, transparent.

If we fail to act now in defense of our expensive healthcare system, our crippled infrastructure, our burdened education system, our costly energy system and our unregulated financial system, it will be too late and expensive in the future, and we will have no incentives. For example, our green revolution is waiting to take off, if government is willing to be the co-pilot. This recession will be not be a short one, its lingering effects will continue to sip in even as recovery efforts make their presence in urban, rural, and suburban areas across America. There is no doubt in my mind that this is the greatest human challenge Americans face, one which will claim more victims than 9/11, the Iraq and Afghanistan wars, and Hurricane Katrina combined.

It's the economy, stupid

Call me an idiot if I deeply believe the American economy is not turning a corner any time soon. And call me an ignorant if I also believe that the small-scale depression choking us up is not all driven by the mortgage loan fallout. This is just a microscopic example of a greater problem.

The problem is multifaceted. The US is pumping $3 billion a week into Iraq with less than perfect oversight. The overall US debt is about $9 trillion excluding state-level debt and social programs like Medicare and Social Security which amounts to about $29 trillion. America is an import culture. Look at the computer you type on, the pen you write with, the cell phone you carry. These little things add up; in 2006 they amounted to the $765 billion American trade deficit, writes Economy in Crisis, a conservative blog.

China is our personal banker, and as such has allowed us to withdraw as much credit as we can incur. According to a Forbes article, several countries including Japan and China hold about 44% of the US debt, a powerful leverage against US interests. Just recently, China’s massive recall on several products containing toxic chemicals has put US interests at odds. While we recoil in disgust at the massive outsourcing of our manufacturing jobs to places in Asia, and cry in despair for the Chinese recalls which have killed our pets and sickened our children, we ironically continue our high demands for subsidy-level prices of Chinese imports by continuing to shop at places like Walmart. See the link. But who is at fault? The US government or the US consumer? I say, both.

But enough said, the truth is, the housing market bubble was due to crash eventually, like it has in the past, the problem lies in our overall domestic economic policy: consecutive tax cut laws which have been now renewed for the 3rd time during the Bush Administration, the outsourcing of manufacturing jobs, the failed enforcing of trade agreements, the never-ending US agricultural subsidies, the continuous funding of an open-ended war, the increased military spending and on top of everything a housing market crash. How could we have missed the warning signs of an economic crisis? Simple. If Iraq is our guiding principle, we can’t expect much economic shrewdness from this administration.