presidential advice: buy stock, don’t hoard cash, trust your banks and financial institutions

In a contribution titled the gathering reaction (ii) I wrote about President Obama’s suddenly polarizing language. The President’s tone has changed—again. It is not hard to understand why.

[...] “The Dow Jones Industrial Average fell 20 percent since Inauguration Day through yesterday, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg,” writes Eric Martin in a www.bloomberg.com release titled ‘Obama Bear Market’ Punishes Investors as Dow Slumps (Update3)

Martin continues:

The gauge lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday [...]

The capital markets are in a free fall—still. With every passing hour it becomes more difficult for the president to argue that he is not responsible for the hemorrhaging—of course he is not responsible—how could he be?—this is not the point, this not anyone’s point—but to paraphrase our sages of blessed memory, President Obama may not be obligated to complete the work, but neither is he permitted to walk away from it even if he is not responsible for it. What he appears to want to do is to walk away from it so that he can focus on what he does care about, energy, education, and health care.

[...] “Rather than pitch ahead to his next message, Obama devoted his address to recapping what his team did this past week to help get people working and spending,” writes Ben Feller in an Associated Press story titled Obama: Time of crisis can be ‘great opportunity’

The President needs to stop issuing his “crisis-opportunity” theme immediately. It is beginning to sound like our crisis is the President’s opportunity. Feller continues:

The goal was to demonstrate that the administration is on the case and, more broadly, that history shows American resilience will win.

“We’ve experienced great trials before,” Obama said. “And with every test, each generation has found the capacity to not only endure, but to prosper – to discover great opportunity in the midst of great crisis. That is what we can and must do today. And I am absolutely confident that is what we will do.”

The echoes of history emerge often as Obama seeks a balance between the practical language of governing and the oratory meant to keep people inspired. Just a few days earlier, he promoted new transportation plans by saying the nation built itself up before, during the Civil War and the Great Depression.

Recent efforts include a more detailed plan to help struggling homeowners avoid foreclosure; another plan to spur lending for people and businesses; an overhaul of the way the government hands out private contracts to reduce waste; and a summit on how to overhaul health care.

He defended his budget proposal, whacked Wall Street “accounting tricks” and sent a message to Congress that it must make some tough choices.

Separately, the president offered advice to people struggling to pay their bills. He told The New York Times that people should be prudent and get back to fundamentals, with an eye on steady savings, reasonable returns and long-term investing.

“What I don’t think people should do is suddenly stuff money in their mattresses and pull back completely from spending,” Obama told the newspaper in an interview posted on its Web site Saturday. “I don’t think that people should be fearful about our future. I don’t think that people should suddenly mistrust all of our financial institutions because the overwhelming majority of them actually have managed things reasonably well.”[...]

Similarly:

[...] “In a 35-minute conversation with The New York Times aboard Air Force One on Friday, Mr. Obama reviewed the challenges to his young administration,” write Helene Cooper with the apt and able assistance of the under appreciated Sheryl Gay Stolberg in a NYT story titled, strangely, Obama Ponders Outreach to Elements of the Taliban.

The credulous duo of Cooper and Stolberg continue:

The president said he could not assure Americans the economy would begin growing again this year. But he pledged that he would “get all the pillars in place for recovery this year” and urged Americans not to “stuff money in their mattresses.”

“I don’t think that people should be fearful about our future,” he said. “I don’t think that people should suddenly mistrust all of our financial institutions” [...]

Various responsa:

(1) Cooper and Stolberg of the NYT describe the president as “exhibit[ing] confidence six weeks into his presidency despite the economic turmoil around the globe and the deteriorating situations in Afghanistan and Pakistan.” [President Obama], they continue, “struck a reassuring tone about the economy, saying he had no trouble sleeping at night.” President Obama has no trouble sleeping at night? Good for him I suppose. A lot of people in North American aren’t sleeping all that well. But even if the president seems confident at his desk in his shirtsleeves according to Cooper and Stolberg, even if he speaks in a reassuring tone, and even if he does “sleep well at night” as he claims, his line has become defensive. By line I mean his view of the situation and his evaluation of the players as expressed in his language. By this I mean that though the president himself may or may not remain confident—neither I nor Cooper and Stolberg enjoy privileged access to the heart of the U.S. President—his line of reasoning acknowledges the grim reality that a lot of people around him no longer are.

(2) Example: the president is now reduced to giving people stock market tips based his analysis of the “profit and earnings ratio,” this according to Jake Tapper of the Political Punch blog. The president is further reduced to advising “people struggling to pay their bills [...] [to] be prudent and get back to fundamentals, with an eye on steady savings, reasonable returns and long-term investing,” according to Ben Feller quoted above. Most bizarre is his advice not to hide our money in mattresses and to trust our financial institutions—this when Bankers themselves have asked President Obama to stop trashing them in his speeches, this after President Obama warned us of an economic “catastrophe” if Americans failed to support his stimulus plan.

The president locates our travails not in our objective experience of our jobs getting cut or the prices of our homes crashing or of our savings disappearing, but in our heads.

This is risible on its face—insulting, even. But it speaks to a deeper issue.

(3) My highly speculative surmise: President Obama’s understanding of the core principles of presidential power in the U.S. system at this stage in its historical development is at odds with popular expectation formed over the past 40 or so years. President Obama behaves not like an executive or an administrator, but rather like a super-legislator. The basis of his power as he imagines it is not the federal government and his administrative role at the center of it. Rather: he imagines that it is Congress, as if the U.S. hosted a parliamentary sytem. President Obama’s instincts—his habits of mind—are those of a legislator, not an executive. Only the U.S. doesn’t host a parliamentary system, and the president is not a super-legislator or a tribune of the people but rather the chief executive, and this is precisely where he is failing. You can hear it in the voices of his spokespeople dispatched to answer for his actions on the various news shows. When asked about directions or changes or accomplishments they invariably talk about pending bills and past legislation.

(4) One example of President Obama’s understanding of his own role would be the ineffectiveness of his vetting process and his failure to seat a cabinet five weeks into his presidency, a primary administrative function. We all know about the tax evaders that got heaved under the bus. Less is known about  Ambassador Chas Freeman, one of President Obama’s top level appointees, a man who was recently on the House of Saud’s payroll and who famously believes that the Chinese were only culpable in the Tiananmen Square Massacre to the degree that they did not “nip [the student protest] in the bud” immediately, and with brute force, and a man who was apparently never vetted. Or how do you account for this? Why has this botched appointment not been tossed under a bus yet?

(5) Another example would be President Obama’s failure to effectively address the banking crisis—a crisis that requires executive leadership to produce an executive solution. [...] “Why do officials keep offering plans that nobody else finds credible?”—asks Nobel Prize Laureate Paul Krugman in a NYTimes.com editorial titled The Big Dither.

Krugman continues:

Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be [...]

What the esteemed Nobel Prize Laureate does not seem to get is that the question of how the U.S. disposes of its failing banks is, as of August of 2007, a foreign policy issue. This is when sovereign wealth funds bailed out U.S. banks. No one seemed to notice at the time. And only a few seem to understand it now. [...] “China for example has made it clear that it hopes that the US will protect at least some of its investments from the risk of losses,” writes Brad Stetser in a Follow the Money Blog blog burst titled Unintended Irony.

China’s Vice Premier Wang Qishan told Hank Paulson:

“We hope the US side will . . . guarantee the safety of China’s assets and investments in the US”

He may have just been thinking of the Agencies … but he also may have had a few of China’s other large stakes in mind. The classic response is that the only investment that is guaranteed by the full faith and credit of the United States government is a Treasury bond.

Yet, it increasingly looks like the US is inching toward severely diluting the common equity of a set of banks where sovereign funds have substantial stakes,* if not wiping out the existing equity entirely. That potentially — as Larry Summers warned in a former life — is a foreign policy issue [...]

Put simply, the sovereign wealth funds who lost big when they bought up U.S. equities right before everything crashed—e.g. China—now demand to be made whole at the expense of the U.S. taxpayer. Were the U.S. to nationalize its banks the shareholders would get nothing. The problem for the U.S. is that the same sovereign wealth funds who own so much of our failing banks are also the principal buyers of U.S. debt—these are the only institutions with liquidity enough left to buy U.S. Treasury Bills. This would be a painful needle to thread for any president. This president, however, doesn’t even seem to care. What matters to him is energy, education, and health care.

He regards our crisis as his “opportunity.”

Besides, none of this began on his “watch.”

He can sleep well at night.

(6) [...] “WASHINGTON (AP) — President Barack Obama offered his domestic-policy proposals as a ‘break from a troubled past,’” writes Tom Raum in an Associated Press editorial titled Analysis: Obama’s ambitious plans raise questions.

Raum continues: 

But the economic outlook now is more troubled than it was even in January, despite Obama’s bold rhetoric and commitment of more trillions of dollars.

And while his personal popularity remains high, some economists and lawmakers are beginning to question whether Obama’s agenda of increased government activism is helping, or hurting, by sowing uncertainty among businesses, investors and consumers that could prolong the recession.

Although the administration likes to say it “inherited” the recession and trillion-dollar deficits, the economic wreckage has worsened on Obama’s still-young watch.

Every day, the economy is becoming more and more an Obama economy [...]

President Obama’s position is deteriorating rapidly. He still enjoys favourable poll numbers. But he has already lost the confidence of the business community, the Republicans who put their hope him, and even moderate members of his own party. Here is where the story gets interesting. President Obama has never faced an adversarial press before—this is probably why Secretary Gibbs and the Obama White House in general obsess about contrary views when they appear in the press (NYTimes columnist David Brooks descended upon by “Obamatons” would be a good example ). He has never faced a determined ideological adversary except for the inept and deeply compromised McCain campaign. He has never held a managerial, an administrative, or an executive post of any kind, ever. He edited a prestigious law journal but never published a peer reviewed article. He was a partner in a boutique law firm but was never attached to a significant case. He was a legislator at the state and national level but attached himself to no significant issue nor legislation. Now he finds himself in the top executive position in the U.S. in the midst of a crisis that rivals the Great Depression.

Our tentative conclusion: history did not prepare this man for this moment. It’s beginning to show. He may well rise to the occasion. But he hasn’t done it yet. Nor has he given us any indication of how he would do it if he could.

yours &c.
g.