What Now?

November 28th, 2011 at 8:38 am

OK.  Thanksgiving’s behind us, the 91% of the workforce with jobs are back to work, and in DC at least, there’s a sense of “what happens next?” in the air.

Here’s one man’s answer:

Anatomy of a failure: It would be a pleasure to never hear the words “super” and “committee” in the same sentence again for a while but I’m afraid it’s actually important to review what happened.  The “both sides are to blame” meme is irresistible but doesn’t hold up to even casual scrutiny.  The D’s on the committee went deep into R territory with spending cuts, putting hundreds of billions of cuts in Mcare and Mcaid on the table, and asked for less revenue in exchange than they should have.  But the R’s wouldn’t really budge on taxes and that queered the deal from the start.  (Their latest retort: “you can’t raise taxes in a recession…even the President has admitted that”…is nonsense.  This is a ten year deal, one that could easily have the tax increases phase in later.)

I’m really not sure how this story gets told and who’d even want to hear it.  But it needs to get out there.

Where’s POTUS? The President should not, IMHO, take any heat at all for not playing along in the deficit reduction follies going on in Congress.  The R’s have made in clear that if he’s for it, they’re agin’ it and I don’t see what’s gained for him getting burned again by them.  If I thought his involvement would contribute to a more positive outcome, I’d argue differently, but I don’t.

He needs to be doing whatever he can to either give the economy the lift it needs, or explain to the electorate why he’s unable to do so.  More on that below.

Rs on parade: The weekly beauty contest has to end soon and a front-runner will likely emerge before long.  At that point, things get ugly.

Slugfest: If Tolstoy had been a political consultant, he might have written, “Every happy election strategy is unique; every unhappy election strategy is the same: start negative and go down from there.”

At 9% unemployment, the opposition’s hand is dealt—they’ll obviously run against the incumbent’s record.

Now, I’m no presidential historian, and I worked for the man, but I’m hard-pressed to think of a president who’s done more and gotten less for it. The Recovery Act, saving the auto industry health care reform, financial reform—all are landmark legislation.  The first two demonstrably helped and the latter two have great potential, though they’re far from reaching fruition.  But none are popular.  I’m not saying there haven’t been large missteps—the handling of the debt ceiling debacle, the precipitous shift to deficit reduction—but the POTUS can be forgiven for feeling a little bit like “no good deed goes unpunished.”

(BTW, one of the more dispiriting polls I saw when I was working for the admin was one showing that the auto bailout polled worse than the TARP.  I get it—people don’t like bailouts, and they had a hard time sorting out one from the other.  But the man made a tough decision—a truly hard, courageous call—that preserved the freakin’ American auto industry!  Can I get a witness here?!?)

Temperatures rising: All of the above is occurring while the electorate’s temperature is rising…at least I hope it is.  News accounts—so this is at the level of anecdote for now—suggest that the failure of the supercommittee may have been a dysfunctional bridge too far for a lot of people (which would imply something good actually came out of the process).

It’s one thing to just throw your hands up and dismissively (and correctly) say “they’re all crazy clowns down there in Washington.” It’s another, however, to get genuinely worried about our inability to self-correct.  If so, that could motivate people to push aside the Tea-Party, Norquist, take-no-prisoners-make-no-compromise group that has frozen our politics and rendered the nation unable to meet the increasingly serious challenges we face.

Europathy: Contagion fears increase as leaders continue to bumble along, slouching toward a solution when the world needs them to be sprinting.  As I wrote the other day, the potential for a country to leave the Eurozone is real, and the magnitude of the disruption from that event is hard to exaggerate.  Imagine you lent the Newman family across the street a couple of grand in dollars and they paid you back in “Newmans” and you’ll get the flavor of what’s going on here.

Still, the thing to keep in mind here is that the solution is known and within the realm of possibility—a large backup fund for banks holding bad debt supported by the ECB (which needs to take a page from our Fed and start printing a lot of euros) and northern members of the zone, and a managed default for Greece.  The politics are really tough, however, and after a week in the UK, I must say I’m more sympathetic.

Folks on this side of the pond need to appreciate how deeply the populaces of the richer countries disdain any bailout.  Yes, true leadership at a time like this means doing things that are deeply unpopular (see note above re President Obama), but that kind of thing is a lot harder in parliamentary systems.  But that’s also why advanced economies have central banks—they’re politically insulated so that they can do the right thing at the toughest time.  In that regard, the real failure here has been the ECB.

(I should note that I’m eating Greek yogurt—made in Greece—as we speak, so I’m trying to do my small part.)

Economy: Oh yeah…that.  Well, retailers apparently had a kick-ass black Friday—the American consumer just cannot be stopped.  But I still don’t see where self-sustaining growth comes from in the near term absent government measures to either boost demand or help revive the housing market.

And to the contrary, there’s a real question as to whether the Congress can get it together to extend the expiring payroll tax holiday (over $100 billion) and extended unemployment benefits (about $60 bn).  With multipliers, that’s 1-2% less GDP next year.

So the slog continues.  Absent Congress, the only idea I can think of to really move the needle is to seriously nudge Fannie and Freddie to get much deeper into the business of loan mods.  More on that soon on these pages, but it probably involves replacing the acting director of Fan and Fred’s regulator, the FHFA.  The current holder, Ed DeMarco (a Bush appointee) has been a tough, responsible regulator.  But he’s not been nearly forthcoming enough regarding modifications and most people who’ve looked into this think that an Obama appointee might help get some things moving.

This isn’t a lot to ask for given the depth of avoidable economic pain out there—we’re not talking about a major coup or firing a faithful ally.  And I’m not saying it will solve everything, but it’s a necessary step and the admin should either take it or explain why I’m wrong.


Print Friendly, PDF & Email

9 comments in reply to "What Now?"

  1. Tom says:

    Also, GM and Chrysler going down would have bankrupted suppliers, probably resulting even in Ford and transplant manufacturers increasing the proportion they buy from imported suppliers.

    Also, the antipathy to the auto bailouts was led by (republican) senators from transplant states, who were more interested in fleeting local advantage than the good of the country.

    Also, the rat Willard Romney dissed the bailouts, dissed the US auto industry, of course, he would be nothing without the auto industry.

  2. Fr33d0m says:

    “The President should not, IMHO, take any heat at all for not playing along in the deficit reduction follies going on in Congress.”

    Well if thats the way we respond to the challenge, he will.

    How about pointing out that this is Boehner’s committee and the Republicans wouldn’t allow an administration official into it.

  3. Tyler says:


    Has President Obama given up on any more stimulus before 2013?


  4. Michael says:

    By this point in the S&L crisis, George HW Bush, no friend to the common man, had 1,000 prosecutions rolling or done.

    At this point in the current crisis, Barack Obama has had 10, all from the same company.

    Obama’s done a lot. But he’s so careful to make sure that some kind of turd is added to every sandwich that it’s hardly surprising that his pathological need to stab his allies has made him unpopular.

  5. Peter K. says:

    “Now, I’m no presidential historian, and I worked for the man, but I’m hard-pressed to think of a president who’s done more and gotten less for it. ”

    I agree and Republicans have been unusually obstructionist. He’s not getting credit because the economy has been bad for three years. He’d probably lose next year except the Republicans don’t like their frontrunner, a Mormon who brought Obamacare to Taxachusetts.

  6. PeonInChief says:

    A small disagreement: While the stores managed to get people out in the middle of the night (yuck!) to shop, I suspect holiday shopping will be an overall bust this year, simply because retailers are trying to palm off crap on us. As someone for whom shopping is an avocation, I’ve seen little reason to make my way to the halls of commerce, and not much more to shop online.

  7. David says:

    The Republicans won’t confirm ANY Obama appointee. So firing DeMarco means replacing him with another “acting” director. Who won’t any more willing to take political heat from the right, I’m guessing.

  8. Christopher says:

    I have a question regarding your comment about “help revive the housing market”…

    My understanding (sorry no links) is that the ratio of the average home price to the average yearly income was around 2-3x for decades leading up to the housing bubble, with prices and incomes differing by region, but the ration more or less holding. This ratio seemed to be the “natural” value so that people could afford to buy a house and have it as a long term asset.

    The housing bubble has basically broken that ratio and that traditional “housing market”. It seems that as long as prices remain high relative to income there is no way to revive the market. It will stay a place where people have to leverage themselves to the hilt to afford a house.

    Am I off base on this?

    • Jared Bernstein says:

      It’s hard to get good data on home prices to income–holding home size and quality constant. IE, people have been buying bigger houses over time so the median house today is different enough than that of a long time ago that I’m not sure what to make out of these comparisons.

      That said, a few observations. First, the ratio definitely grew way out of whack during the housing bubble but it has mostly come back down to historical levels. Here’s a chart. Second, people always have to “leverage themselves” to buy a house, and here in the US, unlike other countries, the gov’t has always supported long term fixed rate mortgages and that’s helped to make housing affordable to lots of middle class people.

      But with the ongoing beating the median family incomes have taken over the past decade, I share your intuition that absent terrible underwriting and irresponsible borrowing and lending, home ownership is getting a lot tougher for the middle class in many parts of the country, especially the crowded parts.