Incoherent Strategy

The economic strategy of the Obama team is fundamentally incoherent. Yes, the team hasn't been in place long -- parts of it are not in place even yet. But we know enough already to know that there are real problems with some of its pillars.

I was no fan of the previous administration, you should recall. I don't regret the change. But how much mileage are they supposed to get out of that? I have to call things as I see them.

What does the Obama crowd think the banks are supposed to do with the TARP money, for example? It has re-affirmed the essence of the TARP strategy decreed by the Bushies. But ... what is the point? Should the banks keep their new cash on the balance sheets to build up capital reserves so they will be and remain fundamentall sound? or at least so they'll look sound? Or should they lend it out, thereby emphatically NOT building up reserves and taking further risks?

A key Congressional ally of the administration is Congressman Gary Peters of Michigan. Speaking recently of his expectation that the banks will and SHOULD take a bullet for the protection of the auto industry, he said: “We hope they [the bankers] will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs.”

Well, that’s the problem. First, what was given them was in the crudest individualistic sense precisely “for their benefit.” The bankers kept their jobs, and thanks to Chris Dodd, who says he was working on behest of the admninistration in this bit of draftsmanship, they also kept their bonuses.

Second, what was given them was also supposed to be for their benefit in a less crude, more institutional, sense too. Those balance sheets. Making the toxic assets (um, legacy assets? or whatever the latest buzzword is?) less toxic.

A separate set of measures, the “stimulus” stuff, is supposed to be doing the separate job of “getting the economy moving again.” Or is it? This administration has no clue.

The interaction of PPIP with the mark-to-market changes gives us another form of the same logical incoherence.

Under a good deal of pressure from the administration and its friends on Capitol Hill, the FASB gave in on mark-to-market, allowing for certain assets to be kept on the bank’s books at higher nominal value than previously. Not unsurprisingly, this has reduced the incentives of the same banks to sell those assets to the public-private hedge funds the administration is trying to create.

Hold them or fold them? You can demand of a card player that he do one or the other. But you can’t coherently demand that he do both at the same time.