The apparent failure of the Obama administration’s first attempts to restore economic confidence gives us the opportunity to look at the whole crisis afresh.
The first thing we need to do, as we reassess the crisis, is realize the extent to which the country was horribly and unimaginably failed by its entire public- and private-sector leadership. The Clinton and George W. Bush administrations, and their Congresses, discouraged savings; legislated non-commercial mortgages in the private sector (a political free ride, as both parties boasted of increasing home ownership at no cost to the taxpayers); raised the ceiling on investment-bank debt leverage on unsecured assets to 30 to one; and acquiesced while consumers piled up debt that enriched Chinese exporters of cheap goods, European and Japanese exporters of luxury goods, and the oil-exporting cartel, including Venezuela and (indirectly) Iran.
The Chinese and Japanese bought over $1 trillion of U.S. Treasury obligations to help finance a completely unsustainable U.S. current-account deficit of over 5 percent of GDP. It was a less morbid version of Lenin’s prediction that the capitalists were so greedy and stupid they would sell him the rope he would use to hang them. The U.S. was the world’s happy bovine, until it became clear that — in the words of President Bush’s customarily eloquent attempt to rally public and congressional opinion — “the sucker could go down.”
The political class squiggled through the election raving about greed and pointing with trembling rage at Wall Street. The financial community is now in a torpor, shattered by the debacle and scarcely able to point out the unbroken, bipartisan, equal-opportunity sequence of government bungling that made this fiasco possible and then made it worse. At every stage, right up to the Pelosian social-policy slush fund of a stimulus package (e.g., stimulus as condoms), almost nothing has been done correctly by government except Federal Reserve chairman Ben Bernanke’s replenishment of the monetary base to fight deflation. As the crisis grew, Treasury Secretary Henry Paulson bustled disturbingly about — saving some crumbling institutions but not others, and submitting half-baked blank-check recovery schemes to skeptical members of Congress. The new Treasury secretary, Timothy Geithner, who was one of the authors of those initiatives, used the same peek-a-boo style in unveiling a vague outline of his banking proposals. It won’t work. Last week’s initiative on non-performing mortgages was much more promising.
The new attorney general, Eric Holder, who tried unsuccessfully to deny accused people the benefit of corporate legal indemnities, has already indicated he will indict everyone he can on Wall Street. Considering the malleability of grand juries and the erosion of due process in this country, this means that virtually everyone is vulnerable, and that the political class intends to win the blame game with business by imprisoning the other side’s debating team. But since almost everyone is to blame, the president would do better to avoid blaming anyone.
He should use FDR’s playbook and stop telling the country how terrible everything is. Half of economics is psychology and he should say that there is a serious, but manageable, problem, that fear and panic should be avoided as the country, united, works on his plan of action toward the solution that awaits. He has to inspire confidence, and to do so must seem adequately confident. Here are some ideas.
First of all, the banking bill should segregate non-performing assets in each bank in a long-term work-out account. (President Bush should never have allowed the media to call the original Bernanke-Paulson proposal a bailout.) Eventually, the taxpayers should make a large profit from the government’s acquisition of bank shares and warrants at prices that reflect the erosion in value of these assets. If politically advisable, these shares and warrants could be prorated out to taxpayers.
Also, the president must encourage people to spend rationally, as FDR persuaded them in 1933 to take their money out from under the mattress and put it back in the bank. He and his officials must propel the banks, by the scruff of the neck and the small of the back, to return to sensible lending. What we have now is capital paralysis provoked by shell-shock and (to take a more optimistic view) conscientious self-reflection. Even Warren Buffett’s predictable and folksy aphorisms are not resonating, any more than did his inane request to have his taxes raised, before his paper loss of over $10 billion.
Taxes on capital gains and institutional interest income should be reduced, to facilitate lending. The government is right to refinance all principal-family-residential mortgages in need of it. Most of those in danger of eviction are victims of what amounted to a government sting operation: Fannie, Freddie, and banking legislation enticed the public and when the house of cards started to come down, the insiders–such as the egregious Richard Breeden (special counsel at Fannie, former SEC chairman, Bush family fixer, chief corporate-governance poseur, and unsuccessful hedge-fund operator)–slunk back into the undergrowth, under cover of the legislators’ banshee-like divertissement about the evils of filthy lucre.
The United States is, amazingly, still the world’s largest and most sophisticated manufacturer, at over $2 trillion. The tax system should incentivize research and everything that strengthens the advanced manufacturing sector–such as computerization, aerospace, and communications–with accelerated depreciation and tax rebates for new employees. Ideally, about 10 percent of GDP would move from the fool’s paradise of service industry–which is a massive tax on real production, because such items as consultancy and legal fees, and excessive medical-insurance and financial-transaction costs, total about $7 trillion–to the most exalted forms of research and manufacturing.
If the president was serious when he spoke on election night about conscripting young people to community and non-combat military service, he should extend the ranks of those programs to include able-bodied, low-income people and redesignate the infamous “refundable tax credits” to low-income non-taxpayers, as income supplements.
There should be a special regime for the automobile industry: A car czar should have a five-year unlimited mandate to combine the Big Three into two, and redesign compensation, work rules, retirement benefits, model design, and marketing. I intend no disrespect to Steve Ratner, but an industrialist like Lew Gerstner (RJR Nabisco and IBM) or George David (United Technologies) would be preferable to a financier. The congressional penchant for keeping Detroit on life support building green cars no one will buy, while the Japanese and Germans devour what’s left of the U.S. market, is financially assisted suicide.
To cool inflation when it surfaces, the government should arm itself with standby ability to eliminate taxes on interest and equivalent income and raise them on all sales (except medical supplies, children’s clothes, and retail groceries). The timeworn reflex of the central bankers–to raise interest rates for everyone, even though each one-point rise in the prime rate is a half-point rise in the cost of living, until inflation is defeated by a bone-cracking recession–amounts to pouring gasoline on the fire until everyone is scorched.
Regulatory changes must not take the form of Orwellian overlordship, as they did in Sarbanes-Oxley. All that is really needed is 1) reasonable lending ratios; 2) prudent variations on mark-to-market, so that short-sellers don’t hold a sword of Damocles over every public company; and 3) the requirement of truth in packaging in risk matters. Sarbanes-Oxley should be repealed. When the time comes to try to pay for all the stimulating pork and flimflam, transaction and selected sales taxes are the way to do it.
The energy crisis has to be attacked by setting ambitious but attainable automobile fuel-consumption and conservation standards, and by recourse to nuclear power. Here, we can learn from the French: Neither the spotted owl, nor the snail darter, nor the Preble’s mouse, nor Al Gore, nor Boone Pickens trying to sell us windmills, must be allowed to stop this. Nor should they be allowed to stop increased offshore drilling: Hurricane Katrina washed out one of America’s most famous cities, but did not spill one drop of oil from the offshore rigs in the Gulf of Mexico.
If radical thinking is desired, some consideration should be given to inviting Japan to join the dollar zone. The rate would have to be adopted carefully, as Japan has a national debt of 180 percent of GDP, but such a move would be a massive quick fix to much of the current account deficit. An appropriate, large oil exporter might also be considered for an invitation. Such a combination, sensibly negotiated, would be a stunning reinforcement of the world’s two largest national economies.
All of these measures except expanding the dollar zone should be rolled up into an omnibus Economic Recovery Act, Obama’s “Take Two.” The president should present them in an updated fireside-chat format, explaining, as FDR did, how the problems arose and what he will do about them. Times like this do not bring only fear and sorrow; they also invite original thinking and strong leadership. Much more of what we have seen in the last four weeks will incite nostalgia for George W., Jimmy Carter, Herbert Hoover, and James Buchanan.