Barack Obama’s audacity of hype crumbles

Buddleia has taken over large parts of downtown Gary, Indiana. The city, once home to 300,000 people, is down to just a third of that. There are mile after mile of deserted, derelict and abandoned homes; sub-zero winds blow in off Lake Michigan.

“Gary, Indiana is like an eagle poised to fly,” mayor Rudy Clay tells me, “All we need is the air of the fiscal stimulus beneath our wings and we’ll soar once again and make America proud.”

By Paul Mason
The Telegraoh (UK)

The mayor has applied for $400 million out of Barack Obama’s $787 billion fiscal stimulus plan. Top of his wish list are automatic weapons and Kevlar vests for the police, and some more police to tote them: last year, in this, the crime capital of the Midwest, he had to lay off police officers due to shortage of funds.

The city symbolises the scale of the economic challenge facing Obama as he approaches 100 days in office. If the president is to deliver something more than the “audacity of hype”, homes will have to be built in Gary, health care delivered, and a way found for its inhabitants to live on something more than benefits and debt. But much of America is in revolt against what needs to happen for this to be achieved. And Obama’s own momentum on the economic front looks weak.

There are three levers the federal government can pull in the face of this crisis: monetary easing, fiscal stimulus and bank recapitalisation. Obama has used all three but so far ineffectively. In each case, he has run into obstacles rooted deep in the US institutional set-up, indeed deep in the country’s psyche.

On monetary policy, Obama has remained a bystander to the efforts of Ben Bernanke at the Federal Reserve. Having reached close to zero interest rates in December, Bernanke announced the Fed would print money in an attempt to bring down real interest rates. Then he travelled to the London School of Economics to tell the world to reject the classic policy of “quantitative easing”: the Fed would buy private-sector debts, not government bonds. Finally, on March 18, after a fractious argument within the Fed, he relented, adopting the classic form of the tactic on a massive scale. During this 90-day gap between thought and decisive action more than 1.5 million Americans lost their jobs.

Monetary easing is beginning to work, but it ran into the two obstacles that seem to plague the Obama administration: inertia and free-market dogma.

With the bank bail-out, momentum had already been lost because of the presidential transition. Henry Paulson abandoned his original policy of buying up toxic debts on Nov 25. Tim Geithner, his replacement, finally came up with a new plan on March 23. Known as the Public-Private Investment Programme P-PIP), it will buy up the bad debts at a generous 85 cents per dollar, allowing the very banks that are being bailed out to participate in the purchase. It provides a massive hidden subsidy from the taxpayer to the banks, say its critics. And, so far, it has not worked.

The P-PIP draws scathing daily commentary on the US news channels. At the IMF’s spring meetings the weekend, the fund’s boss, Dominique Strauss-Kahn, placed heavy pressure on Obama to get his act together on the toxic debts. As with Paulson’s original TARP plan, what stands in the way of credibility is the principle of avoiding nationalisation – even in part – and the determination to resolve the crisis on terms favourable to the banks.

If there is a pattern emerging here it is not incompetence but, say Obama’s critics, “capture”. Both Bernanke and Geithner stood at the heart of the Bush policy elite during the days of dither and denial that followed the collapse of Lehman Brothers. Obama, lacking credible economic heavyweights in his own circle, was obliged to reach into the ranks of Clinton-era Democrats. The irony of Larry Summers’ appointment as chief economic adviser was not lost on historians of the credit crunch: Summers had hailed the 1999 law that deregulated Wall Street as “a major step toward the 21st century”.

Obama is surrounded by decision-makers who had “drunk the Kool Aid” during the subprime bubble and were profoundly committed to the neoliberal ideology of self-regulation that has now fallen apart. Only the fiscal stimulus truly bears Obama’s chosen brand values of audacity….

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