The policy initiatives that Obama would and will pursue if elected – health care reform, greener everything, more money for education, negative tax rates for the less-than-middle-class – were clear throughout the campaign. His pursuit of the mandate he has been given shouldn’t surprise anyone. Nor should anyone bitch about how it’s going, or the price tag within reason. If you don't like it, vote for somebody else next time.
The economy is another matter.
Every economy is cyclical and downturns are necessary. Bubbles get deflated, dead wood get cleaned out, expectations get reset. This one looks and feels especially bad so some government intervention is warranted. The policies of Obama and Geithner have been all over the place and mostly off the mark so far.
It’s especially easy to bitch about the government and economic and fiscal policy if one is not forced to offer solutions. I would like to see three things fixed in the short term and have some ideas about how to get it done. The rest of the economy could very follow along a better trajectory.
- Get the good banks lending again. This is a tough one. The biggest impediment to better access to credit system-wide would be to move the hard-to-value assets off the good banks’ balance sheets. There has been chatter about Citi selling its Mexican bank or its Brazilian credit card processor - good assets. The Fed created TALF in November to help deal with the bad asset situation but hasn’t done anything with it yet.
Starting with Citigroup yesterday, the Fed’s policy should have been that if any institution needs incremental TARP help, the first step that the Fed took was to liquidate the hardest-to-sell assets at Citi. The banks are valuing loan portfolios at 20, 30, 60 cents on the dollar and are afraid to sell them lower. The market needs price discovery. Forced sales can get us there. The buyer might even make some money.
- Put in a natural bottom in housing.
Again, let’s not subsidize people who bought houses that they can’t afford. Ugh.
- Create jobs
Some very important changes in tax policy in the budget outline do the opposite. Raising the capital gains tax creates a disincentive to invest. Less investment equals fewer jobs. Increasing the tax rate on carried interest on funds, particularly venture capital funds, is just crazy. Small businesses create essentially all the net new jobs in this country.
We are going to have a huge deficit. Let’s not offset a tiny part of it with the two above changes. Give the market a hand then get out of the way.