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]

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Calm Down, People: Wall Street is Showing Signs of Improvement

Just minutes ago, Michael Grynbaum at the NY Times reported:

“Signs of improvement in the credit markets brought a wave of relief to Wall Street on Monday morning, as investors sent stocks to another big rally and welcomed comments from the chairman of the Federal Reserve that seemed to encourage a new government stimulus package.

“At the close, the Dow Jones industrials were up 413.21 points or 4.6 percent, closing back above 9,000. The Standard & Poor’s 500-stock index rose nearly 4.8 percent, and the Nasdaq composite index was up about 3.4 percent.

“After weeks of extraordinary coordinated efforts by the world’s governments and central banks, investors awoke on Monday to find — finally — signs that credit was beginning to flow more easily.”

Hopefully today’s positive signs from Wall Street will soon herald good news for the rest of us out here in the hinterland struggling to hold the fort on America’s Main Streets.

To read the NY Times report in its entirety, go here.

The Week the Presidential Race Stood Still

Photo credits: AP

At the HorseraceBlog today, Jay Cost offers his explanation as to why the poll numbers for Obama and McCain haven’t moved this week:

“One week ago, the House of Representatives passed the financial bailout bill. At the end of that day, the RCP average stood at: Obama 49.2%, to McCain 43.4%. As of this writing today, the RCP average is essentially unchanged: Obama 49.2%, to McCain 42.9%.

“Why has the Republican gotten no traction in the last week? After all, the congressional spectacle was supposed to be damaging his prospects because (as the story went) Obama looked so cool and McCain too hot. Now that it's over, shouldn't his numbers be on the rise?

“No. That was never McCain's problem. McCain's problem a week ago is the same as his problem today, enhanced anxiety about the economy. The deal failed to sooth any nerves, so McCain is still in a weakened position.

“We can see this with crystal clarity by looking at what average voters are looking at. Here are the above-the-fold portions of my hometown newspaper for the last five days.”

Read more.

House Fails to Pass Bailout; Stocks Plunge

If you measure the importance of an event by the number of readers’ comments on message boards in the blogosphere, the House’s failure to pass the $700 billion rescue package today was a big one. The Huffington Post article on the failure and subsequent stock plunge has already garnered nearly 3000 comments. But since Huffington Post readers can get that worked up over a perceived slight to Barack Obama, I think I’ll stick with the staid New York Times on this one.

Staff reporters Hulse and Herszenhorn report:

“The vote against the measure was 228 to 205, with 133 Republicans joining 95 Democrats in opposition. The bill was backed by 140 Democrats and 65 Republicans.

“Supporters vowed to try to bring the rescue package up for consideration again as soon as possible, perhaps late Wednesday or Thursday, but there were no definite plans to do so.

“Stock markets plunged as it appeared that the measure would go down to defeat, and kept slumping into the afternoon when that appearance became a reality. By late afternoon the Dow industrials had fallen more than 5 percent, and other indexes even more sharply. Oil prices fell steeply on fears of a global recession; investors bid up prices of Treasury securities and gold in a flight to safety. House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

‘“The vote was a catastrophic political defeat for President Bush, who was described as ‘very disappointed’ by a spokesman, Tony Fratto. Mr. Bush had put the full weight of the White House behind the measure and had lobbied wavering Republicans in intensely personal telephone calls on Monday morning before the vote. Both presidential candidates also supported the plan.

“Supporters of the bill had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Moreover, supporters argued, a lingering crisis in America could choke off business and consumer loans to a degree that could prompt bank failures in Europe and slow down the global economy.

“Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

“Immediately after the vote, many House members appeared stunned. Some Republicans blamed Speaker Nancy Pelosi, Democrat of California, for a speech before the vote that disdained President Bush’s economic policies, and did so, in the opinion of the speaker’s critics, in too partisan a way. “

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