Saturday, March 21, 2009

Obama's Financial Plan

I've been on the beach this week so I mostly missed the sudden rise of populist anger over Obama's dealings with AIG and other financial institutions. Reading over the stories of the last few days, I really worry that this issue could undermine his whole presidency. I see that a poll now has approval of Obama's economic policy at less than 50%. Recent reports show that the deficit is going to be much higher than Obama says. As Paul Krugman says, "The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system." Hardly surprising given that Obama's financial team is made up of Clinton appointees who helped get us in this mess in the first place. Obama's had to react on the fly to this and generally had a terrible week. It seems that the crisis could end Chris Dodd's senatorial career, as well as that of many other politicians of both parties.

Krugman goes on:

Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

I'm really worried. Obviously, Obama inherited a mess not of his own making. I'm actually somewhat hesitant about not bailing out AIG, not because I think the bastards deserve it, but because I'm afraid that letting it collapse will destroy much of the economy and create an even worse situation. Bush let Bear Stearns die and it was a disaster. From what I read, AIG's demise might be even worse because they insure so many other corporations. So I don't know what to do, and I suspect Obama might not know either. But he'd better recognize the popular anger over these corporations and he'd better change his tune that the system is actually OK. Because not only could the whole economy tip over, but his ability to get anything done on any issue could disappear very quickly.