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What Obama Must Do To Have Any Hope of Fixing the Economy

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I voted for Obama.

I passionately want him to succeed in solving the economic crisis.

But before he can succeed, there is something he has to do.

Paul Krugman wrote an article yesterday hinting at the answer:

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions....

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly .... Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

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And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) ...

Officials still aren’t willing to face the facts.
Geithner will never be willing to face the facts. Bernanke will never change his discredited Milton Friedmanite perspective. Similarly, Larry Summers, the head of Obama's council of economic advisors - the most powerful economic advisor on Obama's team - will never change his ways.

They are too wedded to an overly-leveraged, highly-securitized, derivatives-based, bubble-blown financial system. They are too entrenched in outdated economic theories.

Democrats assume that Summers is a tried-and-true veteran, a big wheel during Clinton's presidency, when the economy was booming. But that was before the things which Summers championed - unregulated derivatives, increased leverage, and repealing Glass-Steagal (the New Deal legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming "too big to fail") - had any effect. Now that the fuse he lit has exploded, it should be obvious that he is part of the problem, not part of the solution.

Unless Obama replaces Geithner, Bernanke and Summers with people who get it, and who are willing to fix the things that really need fixing, Rush Limbaugh will get his wish: Obama will fail.
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If Bernanke cannot be replaced in the middle of his term, he should at least be sidelined.


George Washington

As a political activist for decades, I have rejoiced in victories for the people and mourned in defeats. I chose the pen name "George Washington" because - as Washington's biographies show - he wasn't a (more...)

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Very well done George. This is really what is goin... by Arktig Silver on Sunday, Mar 8, 2009 at 11:44:05 AM
will also never change, because he too is wedded t... by Richard Mynick on Sunday, Mar 8, 2009 at 1:38:48 PM
You seem, old man, to have string opinions but not... by Jim Pivonka on Monday, Mar 9, 2009 at 2:46:47 AM
     In order to believe ... by io on Sunday, Mar 8, 2009 at 11:13:15 PM
I loved they way this post started with hope. ... by Janiece Senn on Monday, Mar 9, 2009 at 12:48:56 AM
I don't mean to get all preachy and I have spe... by Janiece Senn on Monday, Mar 9, 2009 at 12:53:35 AM
Well you see, we got the RoboPrez, we got the the ... by William Whitten on Monday, Mar 9, 2009 at 2:15:59 AM
See, this is a perfect example of my previous comm... by Janiece Senn on Monday, Mar 9, 2009 at 8:35:05 AM
Here's another solution to the present crisis:... by Scott Baker on Monday, Mar 9, 2009 at 3:29:44 AM
I believe the crisis of confidence this would caus... by Patrick Sullivan on Monday, Mar 9, 2009 at 5:00:02 PM
Here is the rest of what Mr. Krugman had to say: ... by Jim Pivonka on Monday, Mar 9, 2009 at 4:26:19 AM
The Right Way to Create a Good Bank and a Bad Bank... by Jim Pivonka on Monday, Mar 9, 2009 at 4:32:06 AM
Sorry Jim, but this is ALL hocus pocus--good banks... by William Whitten on Monday, Mar 9, 2009 at 9:43:04 AM
This was well done and now, thanks to you I have i... by Janiece Senn on Monday, Mar 9, 2009 at 8:55:03 AM
Two things I don't get; one is where will ... by Patrick Sullivan on Monday, Mar 9, 2009 at 5:14:00 PM
You know Janice,You need to begin with the knowled... by William Whitten on Monday, Mar 9, 2009 at 10:00:43 AM
I can't say that I'm a financial expert bu... by Janiece Senn on Monday, Mar 9, 2009 at 4:20:18 PM
Janiece (hope I got that right this time); Sorry t... by William Whitten on Monday, Mar 9, 2009 at 5:11:50 PM
I truly do feel your urgency and I get it and have... by Janiece Senn on Monday, Mar 9, 2009 at 7:22:05 PM
Yea Janeice, Lol...I have read Carnegie's book... by William Whitten on Monday, Mar 9, 2009 at 9:53:29 PM
it's almost a comedy in motion my friend, if i... by Janiece Senn on Monday, Mar 9, 2009 at 11:54:21 PM
but hell, I'm tired and going to bed to leave ... by Janiece Senn on Monday, Mar 9, 2009 at 11:59:26 PM
Joseph Story, Associate Justice, U.S. Supreme Cour... by William Whitten on Monday, Mar 9, 2009 at 10:15:28 PM
2) that Foundations whose trustees were empowered ... by William Whitten on Wednesday, Mar 11, 2009 at 11:14:44 AM