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Wednesday, April 15, 2009 4:39 AM

Obama Bets It All On Failed Banksters

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Week in and week out, the best two reads on Bloomberg are Caroline Baum and Jonathan Weil. Please consider Weil's article: Obama Stakes His Fortunes on Failed Banksters.

Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why?

Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.

More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a “big bath” charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor’s dumb mistakes. The company gets a fresh start with the investing public.

Obama could have taken the same approach with the banks the moment he took office, while he still had standing to blame the financial crisis on George W. Bush’s administration, stupid regulators, and corrupt lawmakers -- that is, everyone but himself.

Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.


Whatever the case, as long as the government refuses to remove the cancer of zombie banks from our financial system, there’s little hope the U.S. will return to robust economic growth anytime soon. And the longer our wounded banks are allowed to stagger along with no end-game in sight, the greater the risk for Obama that voters will conclude he’s as responsible for blowing the cleanup as others were for causing the crisis.

He’d better act soon. Time may not be our side any longer.
It's tough arguing with Weil, so I make it a point not to. Indeed I am with him on the zombification of banks, having written about zombie banks for what seems like forever. A good example is Night of the Living Fed from March of 2008 although that was by no means my first post about Zombification.

The key question is "why?"

There are many conspiracy theories circulating on this, the most prevalent of which is these actions are all part of a planned grand scheme for (take your choice) the Fed, Goldman Sachs, or the Bilderberg Group to rule the world.

I dismiss such theories and instead offer misguided belief in Keynesian claptrap. Bernanke and Krugman are also believers in Keynesian claptrap. Krugman even won a Nobel prize.

I am certain that Krugman does not have plans to rule the world or to help anyone else do so.

What makes Krugman especially dangerous is that occasionally he says something that makes perfect sense. See Geithner's Plan, a Gigantic Confidence Game and Geithner's Gift To Pimco for details.

My disagreements with Krugman are many, and deep.

Keynesian and Monetarist theories have been tried many times and have failed miserably on every attempt. It is a perfect record of failure.

The "Keynesian Comeback" is always the same: "The policies were not tried long enough, soon enough, or with enough force."

Please consider a recent statement from Treasury Secretary Geithner: "Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work."

In Geithner's Plan Can Succeed I made the claim that the plan is a purposeful attempt to dump trillions of dollars worth of toxic assets right into taxpayers' laps, just to bail out the banks that got us into this mess.

Is that a conspiracy between the Fed and the Treasury? Yes it is. However, it is also out in the open, in plain daylight as most conspiracies are. Is this part of a Fed plan to rule the world? I doubt it. Rather, Geithner has a ridiculous idea, and he is stubborn enough and arrogant enough to see his plan through no matter how spectacularly it fails.

Of course it's possible (some might suggest likely) that Geithner and Bernanke simply do not give a damn what happens to taxpayers as long as banks are bailed out.

But regardless of what Geithner and Bernanke are up to, all indications are that Obama will continue to support Geithner no matter what happens. Indeed, president Obama's misguided trust in Geithner may even be his downfall in the next election.

The answer as to "Why?" is simply this: President Obama placed his trust in the wrong person, and the president is too stubborn to change his mind or consider other ideas. Unfortunately, the country is sure to suffer the consequences of a long prolonged L shaped recession as a result.

Mike "Mish" Shedlock
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