We’re less than two weeks away from the six month mark of the Obama Administration. Here is a summary I would give to someone who had missed the past six months. I think the groupings are particularly important.
- The bank stress tests worked – regulators now have a common framework to evaluate the health of the 20 largest banks, and these banks are in the process of raising private capital.
- Reports are that the Fed’s Term Asset-Backed Securities Loan Facility (TALF) is working, providing liquidity to certain markets that lacked it.
- There has not been a sudden failure of a major financial institution since the President took office, in part due to significant new government efforts with AIG and Citigroup, and an ongoing flow of hundreds of billions of dollars to Fannie Mae and Freddie Mac.
- As a result, the severe instability that plagued inter-bank lending markets and certain credit markets last fall and winter has largely receded.
- As the Vice President said on Sunday, the Administration underestimated the severity of short-term macroeconomic decline.
- The U.S. economy has lost 2.64 million jobs since the beginning of the Administration, and the unemployment rate is now 9.5%. Most private sector forecasters project economic growth will turn positive in the fourth quarter of this year, with job growth to resume sometime in 2010. The June job report was really bad. Watch the July report closely.
- The stimulus was poorly designed by Congress, such that it is not now having any measurable economic effect, and the bulk of the GDP boost won’t come until 2010. When you combine this with the missed economic forecast, it means the next six months will be worse than they needed to be.
- The President’s budget would result in massive increases in both deficits and taxes, driving by significant proposed spending increases, especially in health care. CBO projects deficits over the next decade equal to 5.2% of GDP, more than double the cumulative deficit projected under current law. Debt held by the public would rise from 57% of GDP in 2009 to 82% of GDP by 2019, while taxes would grow from 15.5% of GDP in 2009 to almost 20% by 2019.
Too soon to tell
- Chrysler and General Motors are still operating. Chrysler has emerged from Chapter 11 bankruptcy, and GM is working through the bankruptcy process. It is good they have not failed, but it is unclear if they will survive in the long run. If either firm falters, will the Obama Administration give them even more cash? In addition, the Administration�s heavy-handed path to bankruptcy upended the traditional capital structure, increasing long-term political risk in the United States.
- There is little apparent progress on the President’s foreclosure prevention plan. According to the Congressional Budget Office, as of [date], no funds had been spent on the program. (See footnote d on page 7 of this CBO report.) It takes time for mortgages to be restructured, so this may just be slow.
- The much-hyped plan to buy troubled/bad/legacy/toxic assets from financial institutions, aka the Public-Private Investment Partnerships (PPIP), is reportedly being dramatically dialed back, almost to non-existence. This means that the Obama Administration’s much-hyped “new way” of doing TARP is basically the old way + the stress tests. After all the bashing of Secretary Paulson and the Bush Administration, TARP’s application to banks looks quite similar to how it looked in December and January.
- The same CBO table shows no spending so far for the President’s small business lending program. I can’t tell if it’s in operation or not.
- There has been almost complete radio silence on trade and open investment. The Free Trade Agreements with Colombia and South Korea are on life support due to Presidential and Congressional inaction. The Buy America provisions in the stimulus law are protectionist.
- The President’s budget and Congressional proposals would significantly increase federal health care spending by creating a new entitlement to health insurance. The President and his advisors emphasize that their long-run budget plan is to “bend the health cost curve downward” by making systemic policy changes that would slow the growth of private and public health care spending. While the Administration has proposed policy changes that would increase the information available to consumers of health care, they remain silent on how to change the incentives to use more and more expensive health care. As a result, the President has no proposals that will slow the long-run unsustainable growth of private health care spending, and the Administration’s promises of long-run budget discipline are unsubstantiated.
- Similarly, the Administration emphasizes the long-run budgetary effects of health care cost growth, but the Administration has no policies to address the more immediate budget pressures driven by an aging population.
Uncertain and unlikely
- Climate change legislation passed the House June 26, but is unlikely to pass the Senate this year or next.
- Health care reform legislation will pass the House, probably in July. Prospects in the Senate are highly uncertain. If legislation moves in the Senate, it will not be until fall.
- The fate of the President’s financial regulatory reform package is unclear. House Financial Services Committee Chairman Barney Frank is talking positively about moving at least part of the package this Fall. Senate Banking Committee Chairman Chris Dodd is busy with health care reform and his re-election campaign. I think it is unlikely legislation will be enacted this year. If something is enacted, it will only be a piece of the whole.
Each of the good items is a joint Treasury-Fed operation.
In my judgment, four initiatives that the Administration hyped heavily appear dead or nearly dead: PPIP, foreclosure prevention, small business lending, and climate change. I respect that others may disagree with this judgment.
There is almost complete radio silence from the Administration on international economic policy, while incremental protectionist measures quietly move into place.
I think that over the next 3-6 months, the President’s economic stewardship will be judged almost entirely on (1) how he deals with the worsening macro picture, and (2) whether he signs into law a health care reform bill that meets his goals. Both are fraught with peril.