Tuesday, April 14, 2009

Analysis: Obama’s Economy Speech at Georgetown University

Tempering his criticism with some effusive praise for our new president, Columnist and blogger Henry Blodget, offers an insightful, thought-provoking analysis of Obama’s “major speech” on the economy at Georgetown University today.

Blodget prefaces his analysis by repeating a concern many Obama supporters have voiced lately:

That said, I wish Obama didn't spend so much time hanging out with Tim Geithner and Larry Summers, who I assume are responsible for the mistakes Obama continues to make in his diagnosis and treatment of the banking problem.

Blodget then inserts his comments in bold into excerpts of Obama’s speech as follows:

No one really knew what the actual value of [the mortgage-backed securities that the banks were making and buying during the housing boom was], but since the housing market was booming and prices were rising, banks and investors kept buying and selling them, always passing off the risk to someone else for a greater profit without having to take any of the responsibility. [TRUE] Banks took on more debt than they could handle. [TRUE] The government-chartered companies Fannie Mae and Freddie Mac, whose traditional mandate was to help support traditional mortgages, decided to get in on the action by buying and holding billions of dollars of these securities. AIG, the biggest insurer in the world, decided to make profits by selling billions of dollars of complicated financial instruments that supposedly insured these securities. Everybody was making record profits - except the wealth created was real only on paper. And as the bubble grew, there was almost no accountability or oversight from anyone in Washington. [TRUE]

Then the housing bubble burst. Home prices fell. People began defaulting on their subprime mortgages. The value of all those loans and securities plummeted. Banks and investors couldn't find anyone to buy them. [TRUE, BUT WITH AN IMPORTANT QUALIFIER..."at the price banks wanted to sell them." This is the whole problem in a nutshell. The banks can't sell the assets at prices the market is willing to pay, because then they'll be bankrupt. Thus, this whole canard about how prices are artificially low--a canard that Obama is unfortunately buying into. ] Greed gave way to fear. Investors pulled their money out of the market. Large financial institutions that didn't have enough money on hand to pay off all their obligations collapsed. Other banks held on tight to the money they did have and simply stopped lending. [NOT TRUE. BANKS HAVE SLOWED LENDING AND TIGHTENED LENDING STANDARDS, BUT THEY HAVEN'T STOPPED LENDING]

This is when the crisis spread from Wall Street to Main Street. After all, the ability to get a loan is how you finance the purchase of everything from a home to a car to a college education. It's how stores stock their shelves, farms buy equipment, and businesses make payroll. So when banks stopped lending money, businesses started laying off workers. When laid off workers had less money to spend, businesses were forced to lay off even more workers. When people couldn't get car loans, a bad situation at the auto companies became even worse. When people couldn't get home loans, the crisis in the housing market only deepened. Because the infected securities were being traded worldwide and other nations also had weak regulations, this recession soon became global. And when other nations can't afford to buy our goods, it slows our economy even further. [TRUE]

Read more:

No comments:

Post a Comment