I was skeptical about Obama’s choice for Treasury Secretary from the very beginning. Here is a man who had a hand in bungling the management of the financial crisis on Wall Street last year and who couldn’t keep up with his own Federal taxes. Now he is expected to be the chief financial steward for the nation? But I was willing to wait to see how he would perform. So far I have not been impressed. He has not instilled confidence, at a time when confidence is the key. Treasury Secretary Timothy Geithner has been mostly a failure so far and, in fact, appears to be exacerbating the nations financial situation. President Obama has not dealt with this situation very well as a whole. We still don’t have a Commerce Secretary a full month after the inauguration. In the middle of an economic situation as bad as this, it seems to me that it would be important for Obama to have a full economic team in place. Obama wasted weeks with the Judd Gregg fiasco and the Lincoln bi-partisan nonsense. Enough already!!! It’s time to get to work. We are on a ship that seems to be taking on more water by the day.
At least half of the problem that Obama, Geithner and the rest of the economic team faces has to do with a lack of confidence… a lack of confidence from investors, from voters, from bankers, and from business owners. It’s psychological. But the actions of the Obama Administration - or lack thereof- have only added to the uncertainty and anxiety in the financial sector. They have not even made any serious efforts to bring calm and confidence to the markets. Instead, Obama has played up the crisis a little too much by talking down the economy at every opportunity. That doesn’t instill confidence.
Investors and voters, uncertain about the intentions of the Bush Administration, took a pause from the panic of last year because they wanted to see what the Obama Administration would propose. Since January 20th, Americans have been waiting for a plan. They want to see details about how Banks will be stabilized. Particularly, everyone has been waiting to hear how the Obama team would deal with taking bad assets off the hands of the banks so that the banking system could rebound. Keep in mind that Americans have already witnessed the bungling of the first half of the TARP funding. Americans have also witnessed the uncertainty from Former Treasury Secretary Henry Paulson, who offered one plan (buying toxic assets or somehow relieving banks of these assets temporarily) but then changed his mind a few weeks later, and failed to follow-up with any sensible cogent alternative plan. That kept the nation in limbo for weeks.
With the inauguration of Barack Obama, people were hoping for a sense of stability and a rebound in stocks. But that hasn’t happened. Geithner tried to offer yet another plan on February 10th, but that plan was rejected outright by observers. There were not enough details offered. The reaction of the markets should have been a clue to someone that another approach was needed.
The Geithner plan calls for a system of “Stress Tests” for the nations biggest banks to determine which institutions have the most toxic assets and the most liquidity problems. According to plan, the Government would buy a greater stake in the banks that are more susceptible to the pressures of the “Stress Tests” and would need more Capital.
But this is not the plan that people were waiting all this time for. People don’t want to hear anything about “Stress Tests”. This doesn’t seem to be a well thought out plan, and in fact, it’s only making matters worse. The lack of detail on what will happen next is also compounding the crisis. Investors and voters want to hear details on what the Obama Administration plans to do to remove the toxic assets from the balance sheets of the banks. This was the single most important thing that observers and investors were concerned with. But Geithner failed to address it. Dealing with the bad assets is the most logical approach proposed so far. Henry Paulson and Ben Bernanke should have stayed with this original plan of parking bad assets until their values could improve (and they would have improved once the housing market and the overall economy began to recover). So why did the Obama Administration decide to float this idea? It only introduced more uncertainty. The situation is not likely to improve anytime soon unless and until the issue of the toxic assets is dealt with clearly and with certainty.
Obama misfired in his initial attack of the economic crisis. He allowed himself to get bogged down in too much political nonsense, spending far too much time selling the Stimulus bill and impersonating Abraham Lincoln, and not enough time dealing with the task at hand. He lost several weeks on his bi-partisan experiment, which ironically ended up being extremely partisan, when time was of the essence. Obama should have attacked these issues simultaneously - the banking system - jobs/recession - and the crisis in the housing market. Instead, he tried to take on these issues, almost one by one…. And in the wrong order. The fact is, team Obama appears to be just as clueless about how to tackle this problem as the Bush Administration was. Obama has assembled two economic advising committees, made up of what are supposed to be some of the greatest economic minds in the nation. Yet, no one seems to understand that at least half the problem (if not the majority) is psychological and that confidence is key to restoring some semblance of order. Why is this so hard for these people to understand? This problem is just as much about human psychology as it is about economic theory.
And after the pathetic Geithner announcement earlier this month (Feb.) regarding the “Stress Tests”, while the market tanked yet again… the Obama Administration failed to offer any sort of follow-up. We haven’t heard anything from Geithner since then. They allowed the uncertainty to fester….allowed rumors to swirl and left too many unanswered questions lingering. This has only exacerbated the crisis. The stock market has dropped around 700 points since Geithners’ announcement.
Eight years of the Bush Administration and the constant negative news reports have led to a sort of psychological malaise among Americans. People are now sitting around waiting for the next batch of bad news to react to, rejecting anything positive. And we have been stuck in this mindset for years. Obama managed to use his hope message to break through some of that during the campaign, but now, when hope is needed more than ever, he seems to be embracing the old politics of fear.
And I’m afraid that the temporary reprieve that investors and voters gave Obama might be about to end. Americans might resume their panic, now that they see that the toxic assets won’t be managed as originally thought and since plans keep changing. Geithner’s “Stress Test” approach will likely only lead to more speculation (and less certainty and confidence) about which banks might be in trouble. This could lead to crashes in bank stock and potentially a run on those banks. A run on any major bank may spread to even the healthy banks, causing a run on those banks as well. Remember, much of the problem is psychological and Americans, especially investors, are not behaving rationally at the present time. Anything can spook the financial markets.
The stock market…and banks may tank even further in the next few days and weeks… unless Obama and his economic team can find their voice and begin to instill some kind of confidence. Obama will be giving a big speech on Tuesday and it will be a chance to instill confidence & hope. And it would be nice if he offered a plan to fix the financial mess.
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