Galbraith: Obama Isn't Doing Enough to Solve the Financial Crisis .." crisis worse than people think

[RedEarth]

The financial crisis is even worse than people think (and people already think it's pretty bad), and we aren't doing enough to stop it, economist and Mother Jones contributor James K. Galbraith told the House Financial Services Committee on Thursday morning. From his prepared testimony:

In 1930, John Maynard Keynes wrote, "The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history." That catastrophe was the Great Crash of 1929, the collapse of money values, the destruction of the banking system. The questions before us today are: is the crisis we are living through similar? And if so, are we taking adequate steps to deal with it? I believe the answers are substantially yes, and substantially no.

Galbraith pointed to six significant problems with the Obama administration's response to the financial crisis. First, he said, the White House is being way too optimistic:



... ad news has been outrunning the forecasts for months. Professional economists, working with the normal models, failed to predict the crisis. In many important cases, including high officials, they actively denied it could happen. Chairman Bernanke was typical: through July of 2007, he argued that the Federal Reserve Board's predominant concern was inflation; thus the Federal Reserve was unable to give Congress a foretaste of a crisis that was to erupt within days. And as the crisis has unfolded, events have repeatedly come in worse than expected or caught us by surprise. This should tell us something.

Second, we know that the origins of the crisis lie in a breakdown of the banking and financial system, following a breakdown in the regulation of mortgage originations, in underwriting, and in credit default swaps. This is something we have not seen in our lifetimes. We know that the actions already taken in response – the TARP, the nationalization of the commercial paper market and the swap agreements with the ECB and other central banks – are unprecedented. We know that these measures have, at best, only averted a deeper catastrophe. And we know that the baseline forecast, which is a mechanical procedure based on statistical relationships between non-financial variables, for the most part, takes none of this into account.

We therefore have no basis for confidence in the baseline forecasts, and we should prepare ourselves, as Churchill said to Parliament at the time of Dunkirk, "for hard and heavy tidings."

The second problem Galbraith identified with the Obama administration's response to the crisis is an over-reliance on monetary policy:

onetary policy today has little power to restore growth. In the Depression they called it "pushing on a string." With interest rates already at zero, there is little more the Federal Reserve can do.

The Obama administration's bank rescue plan is also fatally flawed, Galbraith says:

.....more

http://www.motherjones.com/print/21733


.....also........

Economist James Galbraith, who’s scheduled to testify in Washington Thursday, talks to MarketWatch’s Ruth Mantell about the future of the U.S. banking system and what the Federal Reserve can, and can’t, do help shore up the economy.


http://www.ritholtz.com/blog/2009/02/economist-james-galbraith-stimulus-not-enough/

[liberal N proud]

1. He is doing as much as he can with the obstructionist GOP

As long as the GOP is screaming more tax cuts and the spending is pork bullshit Obama isn't going to be able to much more than he has already.

Besides, He has only been in office on month, these people think he can work miracles.

[Kurt_and_Hunter]

5. His job is to do what is needed, excuses aside

[Wetzelbill]

8. I see where you're coming from

I don't totally buy it though. He could have gotten a much better simulus bill, but he started from a weaker position than necessary, he even admitted that regarding the tax cuts he asked for already in the bill because he said that now he knows they would have asked for more no matter what so why already include that much in the first place. They started from a weaker position on size and tax cuts than necessary, but he does seem to get that now. It was an excellent first effort, we'll see where it takes us on more spending bills and on health care, those are key.

[guruoo]

22. He can still go back and ask for more, and address issues Galbraith and others

have raised.

“It ain’t over ‘til it’s over”

[Wetzelbill]

23. yup

That's the good thing about it, and also having a Dem majority. He does have some room to go back and work out some things if needed.

[Enthusiast]

32. I think President Obama

is having trouble understanding the depths of mean spiritedness of the Reich Wing. If he doesn't recognize that very soon he will be destroyed. Their entire aim is to discredit him in the eyes of the American citizens through any means necessary. And this is only the start. He must fight back using every means at his disposal to discredit them, first.

[Captain Hilts]

37. He needs to start from a better position on healthcare. Don't take single payer off the table...

before you start.

[Wetzelbill]

39. I think so too.

[Captain Hilts]

40. Hold your cards as long as you can...

[SemiCharmedQuark]

41. Yeah. He said he was going to make mistakes and he's making them and will continue to make them.

The key question is: Will he learn from them and rectify them?

[Wetzelbill]

42. I hope so

He's certainly smart enough, so we'll see.

[jobycom]

20. That's why he needs people like Galbraith saying he needs to do more.

He needs the people to understand the problem and demand the Republicans listen, or get rid of them. And he needs to take them on, head on. Because here's what will happen otherwise. Obama's efforts won't be enough, and in four years he'll get blamed for the problem, and people will turn it all back over to the Republicans, whose ideas will destroy us.

Unless Obama is on record early and often saying "I needed more, but they are blocking me," people are going to think he's getting what he wants, and that therefore what he wants is failing. He needs to be campaigning now for 2010, trying to get more votes in Congress. As it is, if he's too positive and things don't get better, he's going to get blamed instead of the obstructionist GOP.

He knows this. I'm not saying he's doing anything wrong yet. He has to act early on as though he can work with the Republicans so that when he begins telling people he can't, they will at least know he tried. Galbraith is helping him with these articles, empowering him to do more. That's my take so far, anyway.

[Enthusiast]

33. Good take, jobycom.

I'm not certain Obama actually does know how close he is to disaster, however. I fear he will find out when it is too late to take corrective measures.

[bertman]

46. I agree with jobycom, too. But this thing is so big it's hard know if anyone can accurately

say EXACTLY what needs to be done. My fear is that he has many of the "complicit" in the ranks of the trusted advisors and may be hearing only one message.

[yurbud]

30. how is it the GOP can obstruct no matter how small their numbers, but Democrats couldn't?

[liberal N proud]

31. Wouldn't we all like to know

[Enthusiast]

34. Good question

And one I would like answered.

[Wetzelbill]

35. A few different reasons

The Republicans are not policy oriented, they focus more on ideology and public relations. This gives them three advantages when it comes to not only obstruction, but passing their own legislation, like they did when they were in charge.

1. Since policy isn't a big suit for them, they don't have huge battles on it within their party, they all basically go along with the same ideology, so it's easier for them to get on the same page and obstruct. Sometimes a few make small compromises but most of them fall in line. It's why somebody like John McCain can be considered a "moderate" even though he voted with Bush 90 percent of the time, it's so rare for any of them to dissent that it just seems like the ones that do are moderate. Also, Republicans set up a whole movement that will eat their own if somebody strays too much. You compromise even a little bit with Dems and, at least in the past, you risk a well-funded primary challenge.

2. Because of their public relations skills they have framed the debate and scared the hell out of Dems for decades now. Watch in the media, even now after the Bush years the status quo media doesn't challenge the idea of tax cuts, it's just assumed that they are great. Like you remember Charlie Gibson going after Obama and Hillary in the ABC debate last year? Oh if only the media went after Bush on Iraq or his policies that hard, and Chuck was talking about a tax that only affects the Richie Rich crowd, like himself. Look at the stimulus debate, the media had way more Republicans on polluting the airwaves with their polluted view. They controlled the whole debate, and the media was so in love with the idea that Obama had lost control of the whole situation. Well Obama isn't scared of these guys like the doormats in Congress who have been there for most of the last 28 years. He just got his bill passed and that was that. But congressional Dems are so scared of their shadows and the GOP debate framing that they'll give up the farm rather than put up much of a fight. I can tell you this, if Mitch McConnell had the majority Harry Reid has, he'd force Dems to filibuster and then pick off any Blue Dogs that he could to get it through. Reid isn't really willing to force these guys to filibuster. I can tell you this if they rammed through a better, bigger stimulus bill and named it something to frame the debate like "The American Freedom We Love Eagles And Apple Pie Job Creation Act" they almost assuredly would have still gotten Specter and Snowe to vote for it. Dems don't think like that, they are more fearful of 41 Republicans than the Republicans were of the majority party in the last few years. They're so beaten down from losing the debate they just automatically roll over now.

3. Since the GOP is so ideologically rigid, it helps them pass or obstruct legislation. By that same contrast, Dems are not as ideologically rigid. They have a coalition of Blue Dogs and others who lean in that direction on certain issues who almost always capitulate somewhat to the Republican side of things. Republicans can obstruct or pass legislation because while they have few people who will compromise to the left, they know they can pick off Dems to compromise to the right. And always remember every compromise is to the right. Like on the stimulus bill, the three Republicans didn't step over and vote for a bill that had no right-wing compromises in it. It was significantly watered down and that didn't even budge most Republicans. Republicans make no left of center compromises, but the Dems have people who consistently go the other way. They have a whole philosophy built around it, it's called the "Third Way." Could you imagine a moderate Republican getting a nomination? There hasn't been one since Gerald Ford. Bob Dole even became a supply-sider when he ran for president as did Bush Sr. Republicans simply know they can obstruct and get Dems to capitulate to them, but it really doesn't work the other way around.

Now technically, none of this has to happen. Dems could stop it, there are no real rules or anything in Congress that prevents it, but it's because of these reasons they do it anyway. It makes little sense, I know.

[KoKo]

43. Well said... good read...

:thumbsup:

[Wetzelbill]

45. Thanks

I blacked out like Will Ferrell in "Old School" when I typed that. :)

[Captain Hilts]

38. That's very true. nt

[rateyes]

2. Galbreath is one smart cookie, and Pres. Obama would do well

to listen to him. IMO, he should have been the new Treasury Secretary, or should be named to replace Bernanke at the Federal Reserve.

[jobycom]

13. He was my choice for Treasury, too. He's more often right than wrong, and more often right

than many others I've seen.

In this case I hope people listen to him, and I hope, without much hope, that he's wrong.

[Kurt_and_Hunter]

3. The baseline estimates are so rosy they beg the question why we have a crisis

If anyone actually believes the baseline estimates then there wouldn't be much need for half the measures in the pipeline.

Fortunately nobody believes them.

I hope.

[Wetzelbill]

6. I can't see how anybody could

Good point.

[Wetzelbill]

4. I'd say he's right

Great post!

[maxsolomon]

7. no, i think it is just as bad as it is.

what i KNOW is that we're half-assing this - stimulus money for ROAD CONSTRUCTION? that's the old paradigm.

[Wetzelbill]

9. that's a great investment

My uncle was a contractor and lost his business during the Bush years, that road construction alone is going to put him back in business and he'll be able to provide work for a good 20 people or so on any given contract. That's not an old paradigm, it's just a neglected one which doesn't make it obsolete at all.

[maxsolomon]

12. i guess i read too much Kunstler.com

we need to flip the money we're putting into roads & rail. maglev trains from LA to Las Vegas shouldn't be a joke, they should be under construction.

[Wetzelbill]

15. exactly right

They should be under construction. Republicans like to search through bills and find stuff that sounds funny that they can sneer and giggle at, but they're just stupid nowadays. Psh, volcano monitoring? Magnetic levitation? Sounds like voodoo to me, those wacky libruls. That's how they are, it's embarrassing. Paul Krugman called them the party of Beavis and Butthead yesterday.

[kestrel91316]

17. Vegas is doomed. They won't have any water or electricity in 15 years.

A maglev train to nowhere............

[maxsolomon]

25. that's a good point

i should have said we need a vancouver bc to portland maglev. we have water in the PNW.

[kestrel91316]

28. Yep. We need a maglev to connect all the major west coast cities.

Maglev to Vegas is a boondoggle.

[Wetzelbill]

18. I should add

that yes there is a bit of a new paradigm, it does fit into the old one, or I guess some could say the old one fits into it, but we do have a different era. Certain types of investment in technology or internet related things too would be good. This all falls into the "Stuff That Republicans Ignore" bin. While the rest of the world has been working towards cutting edge internet speed technology etc, we've twiddled our thumbs, for example. We lag in so many areas that we can now invest and create so many jobs and a better quality of life, it's a tremendous opportunity to be innovative do things right. It's sad that it took a financial meltdown to get us to this point, but we need to run with it.

[denverbill]

10. I agree with Galbraith about this snippet-

Galbraith sees no alternative to putting "several very big banks" that are "deeply troubled" into receivership, breaking them up, firing existing management, and selling them in parts or relaunching them as "multiple mid-sized institutions. While that happens, he says, there should be a publicly-run bank "to provide the loans to businesses – small, medium and large – sufficient to keep them running through the crisis," as the Reconstruction Finance Corporation did during the Depression.

-------------------

Take them over, break them up, and fire the management.

And one more thing - Never let them merge back together again, ever!

[rateyes]

11. Exactly. No more "too big to fail" banks, corporations, or anything else. nt

[jobycom]

14. Yes. nt

[kestrel91316]

16. Galbraith must be part of the MTV generation, expecting instant results.

He, like most Americans, probably watches way too much tv and doesn't know much about REALITY.

Rome wasn't built in a day. This mess took time to make and it's gonna take time to clean up.

[Wetzelbill]

19. he says nothing like that

[kestrel91316]

26. Oh yeah? "Isn't doing enough" one month into Obama's presidency

certainly qualifies in my book. That's pretty childish and impatient.

[Wetzelbill]

29. that's a far cry from saying he wants instant results

You're not even close. He's simply saying that he needs to do more, which is what virtually all economists are saying, not that he needs to have it done right this second.

[Kurt_and_Hunter]

21. It's not the heat, it's the humidity

Surprisingly, cliches, bromides and self-important snark are not likely to save us from global disaster, but thanks for the input.

Your post suggests a lamentable disconnect from REALITY since what is being discussed is faulty PLANNING not RESULTS.

Even the pre-MTV generation knows that planning precedes results, and that time is often of the essence in planning to counter exigencies.

[Wetzelbill]

24. I think it helps

to read the posts or at least skim them, you know? But sometimes I think people are sensitive enough about Obama that they take offense when there really isn't anything offensive there. Galbraith isn't saying anything that much different than what most economists are thinking. The general consensus that I've been seeing is they think Obama does need to do more.

[kestrel91316]

27. Planning in a RUSH is more likely to fail than planning done carefully

and methodically. And you seem to have completely forgotton about Obama's inaugural speech where he said things were NOT going to get fixed quickly.

I'm not the one disconnected from reality in this picture. If you are such an expert, why are you not working for the administration in a high-level position?

Get a grip and GROW UP.

[Kurt_and_Hunter]

36. It's fine that you don't understand these things, but you are hostile and arrogant in your ignorance

[JohnWxy]

44. great article. I especially liked the part about the publicly run bank in the near term -

"While that happens, he says, there should be a publicly-run bank "to provide the loans to businesses – small, medium and large – sufficient to keep them running through the crisis," as the Reconstruction Finance Corporation did during the Depression."

This would make credit available while the Wall Street banks flounder around to some sort of a resolution of their bad debts situation.