Obama’s administration, shaken by the crisis

February 12, 2009

US: Obama’s administration, shaken by the crisis
By Juan Chingo

In the heat of the brutal economic crisis that destroyed another 598,000 jobs in January 2009, the enthusiasm between Obama’s election and his inauguration and his first days of governing has rapidly dissipated. This is one sign of the problems that he confronts and of the exceptional times we are living through. The hundred-day honeymoon that is given every new US President has not ended, but after scarcely twenty days his administration seems confused, pulled between pressure from the banks and the financial aristocracy that is running the country, to exert pressure so that the costs of the crisis fall on the shoulders of working people, whose expectations that Obama’s arrival in power would mean some change in their desperate situation, caused by the deterioration of economic conditions.

The crisis of the chosen road of compromise

For some analysts, Obama’s administration already appears more incompetent than Bush’s on its worst days. Some respected ultra-liberal bourgeois analysts, like Martin Wolf, who begins his February 11 article in the Financial Times by even wondering if Obama’s presidency has already failed: "Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger.... Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating." This incipient political crisis, a very few days after having taken office, is a result of the extremely compromising, national unity road chosen by the new President, very far from even Franklin Delano Roosevelt’s politics of a complete break during the Great Depression, which avoided the dissatisfaction of the masses strengthening their radicalization independently of the two big parties of the bourgeoisie, in spite of the big mobilizations that took place, although Roosevelt did not succeed in getting the economy to return to the level before the Depression. This is what can be observed both in the stimulus plan approved on Tuesday, February 10, by the Senate, the plan that on Wednesday, February 11, was harmonized with the version adopted by the House of Representatives, before being promulgated by the new President, and in the details of the new financial stability plan announced by the new US Treasury Secretary Timothy Geithner, on the same day. On the one hand, his political choice of struggling hard for a bipartisan consensus did not get a single Republican to vote for the House version of the stimulus plan, which they denounced demagogically as a "socialization" of the economy that would bring with it the setting up of a European style "welfare state," this coming from the right-wing Republican program, which consists of lowering taxes on the rich even further and destroying what little remains of Social Security, by transferring public money to big capital, but by other ways than those proposed by the Democrats. But their pressure on the Senate, where the Democrats had to add support from three Republican Senators, succeeded in doing away with the minimal palliatives that the plan had, in order to make it acceptable to the masses, like help for state governments, building schools, or increasing food stamps, central features of the more than 80 billion dollars that were cut from the version adopted in the House of Representatives. On the other hand, some provisions, like a tax credit for home buyers, which some analysts call the "transfer your house to your brother" clause, which will cost a lot of money and do nothing to boost the economy, were incorporated in the bill. Not accidentally, popular support has diminished, as shown by opinion polls before the plan’s approval. Neo-Keynesians like Paul Krugman, disappointed by the law that passed, blame the bipartisan strategy followed by Obama: " ... that was his best opportunity to take decisive action, and it was cut short."

On the other hand, the new financial rescue plan shows that Obama is as subservient to the interests of Wall Street as Bush’s politics were. The content of his new plan can be summarized as a "no" to the nationalization of the banks and to punishing investors. These are the political limits that the administration is unwilling to touch. In this connection, although Geithner is trying to present the new bailout plan, called Financial Stability Trust, as something completely different from the infamous Troubled Asset Relief Program (TARP) — promoted by Bush’s former Secretary of the Treasury, Henry Paulson — by saying that it includes strict requirements of transparency and responsibility and harsh restrictions on banks that receive additional bailout funds, in reality, it has followed the same outline. The supposed limits on executive pay and other requirements on the banks are really largely ephemeral, designed to mitigate distrust by the population and conceal another big transfer of public resources to the financial elite. But, in spite of these guarantees for investors and bankers, no plan has ever been so openly rejected by these same groups, as shown by the severe decline of the stock market while Geithner was speaking, although on the following day they rose a little, in expectation of new details. The problem is that the lack of specificity and of a direct and open promise to get rid of bank losses at the expense of the population, inflamed scepticism and open hostility of the financial markets. As Nouriel Roubini stated, "The weighty proposal of the US Treasury to dispose of toxic assets could be best understood as a combination of removing toxic assets from the balance sheets of the banks and giving governmental guarantees to those private investors that buy them (and/or providing public capital to finance a private-public ’bad bank’ that would buy such assets). But this plan is so non-transparent and complicated that it received disapproval from the markets as soon as it was announced today, while all the main indices of equity in the US fell sharply" (RGE, February 10).

An insolvency crisis that will begin the Second Depression, if it has not already begun

The fundamental question, as we have already said innumerable times, is that we are facing a complete bankruptcy of the US and UK banking systems, as well as those of some European countries. As Martin Wolf indicates in the note quoted above: " ... a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects."

The Obama administration’s new plan continues treating the question as if the financial crisis were only of illiquidity ["insufficienty of cash," according to Webster], betting, in an unreal manner, on an improvement of economic perspectives. The risk of this policy, as the alarmed Roubini warns, is that "The current focus of the US and Great Britain could end up resembling Japan’s zombie banks [1] that were never properly restructured and ended up perpetuating the credit drought and the credit freeze." For that reason, the guru of the current crisis is proposing nationalization, but he regrets that, for the moment, it is not politically viable. But for this to be justifiable from the point of view of capitalist property, the majority of the banks (the four biggest ones and a good part of the regional banks) would have to be clearly insolvent. Now only CitiGroup and the Bank of America seem to be in that state, but not yet JPMorgan or Wells Fargo. But this could be the reality if the economy fails to improve within 6 to 12 months, as the government yearns for. Besides the big banks, some big consulting companies like RBC Capital indicate that in the next 3 to 5 years, as many as 1,000 financial firms in the United States will close, as a result of credit granted to finance tertiary real estate investments (those intended for office space, commercial and industrial space) a category that threatens to become the next sectorial black hole. Its previous prediction was 300 firms closing. In 2008, 25 firms closed, and so far this year, 9 have done so, which implies that there will probably be 100 closings this year. The worst will come in 2010 and 2011. For its part, a report from Credit Suisse indicates that US real estate sector losses still pending will be $1.6 billion, that is, the trifle of 18% of the total US real estate market, with nonpayments especially concentrated among the Alt-A morgages, those set up with incomplete documentation.

In other words, everything would still have to fall some more, for more radical measures to be acceptable. But the risk for the entire economy could be truly profound, as Roubini warns: "Then, the current strategy — Plan A — might not work, and Plan B (or better put, Plan N of nationalization) would end up being the road to follow later on, this year. Wasting another 6 to 12 months to do the right thing could be an error, but the political restrictions facing the new administration — and the slight remaining possibility that the present strategy would work, thanks to some miracle or luck — suggest that Plan A ought to be exhausted before advancing towards Plan N. Wasting another 6 to 12 months could mean the risk of transforming a U-shaped recession into an L-shaped one, close to the Depression, but at present, Plan N is still not politically feasible." And this without taking into account that still in the case of nationalization, the state would assume all the garbage debt, that sooner rather than later will have to be declared a loss, that is, it will have to face debt restructuring in order to repair capitalist accumulation. And the fact that this is necessary not only in the banking and financial sector, but also in other parts of the economy, that is, big corporations, the housing mortgage sector, and the commercial sector, and households themselves, that have excessive debt, compared to their income. More precisely, debt service compared to income is the highest since the Great Depression. Up to now, corporations’ costs and household consumption were being reduced, in order to cover debts. But until now, there has not been much restructuring: that is why it is likely that 2009 and 2010 will be years of bankruptcies and restructuring, which will be enormously painful and will test the political system.

In this context, it is becoming ever more clear that the financial aristocracy that represents the dominant power in the US, to which the leaderships of the Democratic and Republican parties answer, appears as an insuperable obstacle for a solution to the crisis — with its amassing of capital, that exacerbates the rationing of credit and the spiraling fall of the "real economy," confident that it can eventually force the government to absorb the total costs of its own losses — risking entering the Second Depression, if we have not already entered it. The extreme rise in unemployment, the contraction in world commerce, that is declining much more rapidly than at any moment of the Great Depression, and the collapse in industrial production, would appear to confirm it. Or on the financial terrain, the rise in the yield of ten-year US Treasury bonds, that has grown from 2% to 3% since Christmas, in spite of the enormous efforts to lower the rates. That is, what one has to pay to get a loan of certain sums of money is growing, in spite of the fact that the fall of the economy is increasing, which in economic terms is called debt deflation.

This dark outlook, that could trigger popular dissatisfaction, now strongly contained by the illusions that Obama’s victory awakened, could be ominous for the entire US economic system, that could wear out this containment valve earlier than expected, in order to save itself and in accordance with the interests of its highest groups.

[1] Zombie banks continue operating, but have already really gone bankrupt, or in the best case, have sufficient capital to stay afloat, but do not do anything that a bank allegedly should do, that is, lend to firms and households.