Coming Up Thorns
The government says it sees "green shoots" sprouting among the thorny economic indicators. We fear that this is a willful triumph of hope over reality--a way to avoid hard decisions and wait to see what happens next. The happy talk may yield bright headlines for a few days, but it could be dangerous for the Obama presidency.
The US economy, not to mention the world's, is nowhere near what ordinary mortals would recognize as recovery. Most arrows still point downward: home prices are dropping at record rates, foreclosures are at an all-time high, retail sales continue to plunge and industrial production is at the lowest level since 1998. Meanwhile, the unemployment rate climbed to 8.9 percent as 539,000 people lost their jobs in April, only a slight improvement on the 699,000 jobs lost in March. April may not have been the cruelest month, but it was still the sixteenth consecutive month of job losses, pushing unemployment to the highest level since 1983. White House economists can cherry-pick the numbers, but premature optimism could swiftly undermine the president's credibility.
One thing that has improved lately is the White House's ability to stage-manage events and spin the news. Recall that Treasury Secretary Tim Geithner's early policy announcements were disastrous, spreading panic instead of confidence in the marketplace. Now Geithner is all over the major media explaining the results of Treasury's "stress tests" for the nineteen largest banks before the numbers were released. No banks are insolvent, he assured, and none will be allowed to fail. The media, fed tidbits of good news, spread the glow. The tests were a collegial collaboration in which endangered banks were allowed to talk the examiners out of more dire conclusions.
The Treasury results probably underestimate the storm ahead but are still quite ugly. A number of the leading banks must somehow come up with another $75 billion in new capital. Treasury gives them six months to do it. How might they manage this? By pumping up a new stock market bubble and selling many more shares before it pops. What happens if the bankers fail? The Obama administration does not say. But stand ready, taxpayers. If hope dies, we will be asked to rescue the bankers again and again and maybe again.
The most disturbing aspect of Obama's approach is his reluctance to face the dimensions of the economic catastrophe. The president is clearly hoping to avoid that decisive moment when he must assume full direction of failing financial institutions, either by imposing conservatorship over banks or through temporary nationalization. He is trying to have it both ways--providing enough public capital to keep banks afloat but not claiming the power of controlling ownership. But events are forcing him into a corner, and he may have to claim that emergency power.
The "hands-off" pretense already looks strained. Treasury holds 36 percent of Citigroup, all of AIG and a growing stake in GMAC. At some point, the charade of "private enterprise" living on public funds will have to be abandoned--especially if these banks stick with their reluctance to restart lending.
Obama's awkward ownership dilemma may come to a head in the auto industry. The restructuring plan for General Motors is still unfolding, but the current version calls for 89 percent of the reformed company to be owned by the Treasury and the United Auto Workers retiree trust fund (which also holds 55 percent of the new Chrysler). So who is going to run GM? If not the government, might it be the workers and their union? Or will both of them defer passively to corporate managers?
The plan for GM, not yet accepted by Washington or the UAW, poses an explosive question. The blueprint calls for GM to close four North American assembly plants; double its car production in Mexico, South Korea, China and Japan; and sell the cars back to the US market. Those terms are poisonous for American autoworkers and taxpayers--saving the company by dumping the workers and boosting foreign imports. If that is the deal, wouldn't bankruptcy be a better choice?
As for the banks, citizens are asking similar questions. If we own 36 percent of Citigroup, why is the government allowing the bank to punch up the interest rates on its credit cards? That sounds like hitting the same folks twice. Other financial institutions, meanwhile, are squeezing businesses by canceling lines of credit--the opposite of what Obama says he wants. This may or may not be good for the banks, but it is definitely not good politics. Americans are not being served.