The Curtain Falls on Act One
by Charles Lemos, Fri Feb 13, 2009 at 10:00:48 PM EST
Tonight the curtain falls on Act One of the Obama Presidency with the passage of the $787 billion American Recovery and Reinvestment Act, otherwise known as the fiscal stimulus. I am not quite sure if what we have just witnessed is a comedy of errors or tragedy in the making though I remain hopeful that this was just a modest exposition, an introduction to the ever-changing cast of heroes and villains in our continuing national drama. The President now has a record, a legislative accomplishment even if it is more modest than most of us would have preferred.
This bill, passed with the support of just three Republican Senators despite a full-court press by the President to secure broad bipartisan support, does begin the task of rebuilding the nation by investing in the nation. The bill invests large sums for education, health care, energy, transportation and technology that will create jobs not just in the near-term but over the long haul. And the bill also extends the social safety net that has been badly frayed by the Republican class war on the middle class and on the poor. That the President failed to adequately frame and tout the merits of this bill to the American people is, I hope, a lesson that his team has learned. This bill, as Terence Samuels of the American Prospect observed, should have been called the jobs, jobs, jobs bill.
Still as the New York Times notes "it is beyond the scope of any one bill to counter the worsening recession." The awful truth is that the economy will continue to shed jobs and 2009 will be marked by a painful contraction of the global economy. The problem is a systemic one and it cannot be cured by fiscal stimulus or even shock therapy. A fundamental reworking of our economic priorities is in order. We need to rethink globalization and unregulated free markets. We have to tackle the world that securitization built, a financial system run amok.
But before we can do any of this we must tackle the banking crisis that has been building across the globe. Just today in the UK, the Lloyds Banking Group, formed recently by the merger of Lloyds TSB and HBOS, announced an £11 billion in losses causing the stock to plunge 23%. And the British taxpayers already own nearly 43% of Lloyds. It is probable that they are about to own even more of it. Banks so far have been injected with capital, mostly loans, in numerous countries but outright nationalizations have occurred in just Iceland, Estonia, Venezuela and Austria. They are coming in Britain, Spain, Ireland, Russia, Germany and the Netherlands.
The US banking system is clearly in trouble. For more than a month now, economists from Paul Krugman to Nouriel Roubini to Joseph Stiglitz have been calling on the Obama Administration to act and act decisively. Losses are now above the one trillion dollar mark and headed for two trillion and beyond. It is to be expected that rising unemployment will trigger deeper losses on credit cards, mortgages and home-equity loans as more consumers fall behind on their bills further eroding the bank's position. Combined with these problems is the growing ripple effect from the fast sinking commercial real-estate sector that will force banks will to bolster their loan-loss provisions, eroding profits further.
The balance sheets of the nation's banks cannot sustain this sort of bleed. The banks are in a death spiral and if this is allowed to continue, it will bring down what's left of the economy down with them. This is now the second act in this drama. We must save the banks. The banks are effectively insolvent. They are headed for bankruptcy. If you can't call it nationalization for "cultural reasons", then call it a receivership as Mr. Roubini has suggested.
If we don't solve this in Act Two, then Act Three will see a full tragedy unfold. It's time to act.