Obama's Wrong Message

by John M. Curtis
(310) 204-8700

Copyright January 8 2009
All Rights Reserved.                    

        President-elect Barack Obama warned of “dire consequences” should Congress not pass his new stimulus plan, designed to fund a massive “public works” project, comparable to one promoted by President Franklin D. Roosevelt.  “In short, a bad situation could become dramatically worse,” warned Barack, if the government doesn’t spend its way out to today’s financial crisis.  Public officials, especially presidents with the power of the bully pulpit, shouldn’t spread doom-and-gloom, no matter how true or urgent.  Like a good cheerleader, presidents can make matters worse when they jump into the prognostication business.  Obama isn’t known, up to this point, for his economic prowess, relying heavily on a coterie of advisors, especially former Federal Reserve Board Chairman Paul Volcker.  Volcker took over the Fed Aug. 6, 1979 during President Jimmy Carter’s economic “malaise.”

            President George W. Bush graciously arranged a private presidents’ White House luncheon Jan. 7, including his father, George H.W. Bush, Jimmy Carter and Bill Clinton.  Barack expressed gratitude for the chance to share-and-learn—especially on economic matters—from past presidents.  He inherits an economic disaster from the day’s host, including an unprecedented $1.2 trillion budget deficit.  He learned about the economic nightmare under Carter’s watch, a stubborn recession under Bush 41 and an economic boom under most of Clinton’s reign, until the dot.com bubble and stock market burst in March 2000, his final year in office.  Coming out of the meeting, Barack warned of an economic calamity should Congress not adopt his new $800 billion stimulus plan.  Since warning the public, the stock market reversed course and resumed its downward slide deep into a bear market.

            Since the latest “financial panic” of 2008, pegged by former Fed Chief Alan Greenspan as a “once in a century” event, the stock market has been in a freefall, losing nearly 50% of its value since November 2007, when the Dow Jones Industrial Average peaked at 14,000.  By November 2008, the Dow nosedived to 7,700, a whopping loss of $10 trillion in total stock market capitalization.  Since the November bottom, markets have feverishly tried to climb back, rising last week to 9,000.  Perceptions of economic weakness are poison to the stock market.  No investor, including the nation’s biggest mutual and hedge funds, wants to hear about impending doom.  Presidents should be setting up positive expectations, a key ingredient in stock market behavior according to the the late Clairmont Graduate University management guru Peter F. Drucker, awarded the presidential medal of freedom in 2002.

            Drucker believed that “rational expectation” drive the stock market, where human behavior plays as much a part of market performance as micro or macroeconomics.  Obama has been blaming the current financial collapse on “an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington,” blaming the mess on greed and unethical behavior.  Recent revelations about New York hedge fund manager Bernard Madoff’s $50 billion Ponzi scheme underline his point.  Five years of runaway oil and fuel prices also damaged the economy, beyond Washington’s mismanagement and corporate greed.  Add to that unprecedented defaults and foreclosures on risky subprime mortgages, decimating a home equity boom and you’ve got the trappings of today’s disaster.  Obama believes the answer is more government spending.

            Since the crisis began the Federal Reserve has poured more that $10 trillion into troubled banks and corporations.  Only $750 billion, less that one-tenth, was authorized by Congress in the so-called Troubled Asset Relief Program [TARP], repudiated by Treasury Secretary Henry M. Paulson Dec. 19, 2008.  He and Fed Chariman Ben S. Bernanke persuaded Congress Oct. 2, 2008 to approve the $750 billion plan to buy up bad commercial paper or debt.  Paulson shocked Wall Street reneging on TARP, allowing troubled financial institutions to spend bailout money on mergers, acquisitions and executive compensation.  “The very fact that this crisis is largely of our own making means that it is not beyond our ability to solve,” said Obama, urging Congress to adopt his new $800 billion bailout plan.  No economist can say with certainty how best to spend government money.

            Presidents and other high-ranking government officials shouldn’t frighten the public about economic disaster, or any other possible calamity.  It doesn’t take much to sow panic, especially in the stock market where nervous investors find any excuse to bail out.  Obama’s wants to create new jobs developing alternative energy, retrofitting government buildings, streamlining medical records, expanding broadband networks, etc.  “It’s a plan that represents no just new policy but a whole new approach to meeting our most urgent challenges,” Barack told an audience at George Mason University.  He hasn’t explained how he plans to get cash into the hands of ordinary consumers to fuel the economy.  Without saving homes from foreclosure, refinancing bad mortgages for cash-strapped homeowners and preventing oil companies from gouging consumers, it’s doubtful he can fix the economy.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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