Risk & Compliance

Pursued by Obamabears

Investors fret that President Obama's crisis response is not up to the task.
Economist StaffMarch 12, 2009

Barack Obama has modelled his early days on those of Franklin Roosevelt, the last president to take office during a serious economic crisis. But by one benchmark he is failing. At market close on March 11th, despite a rally this week, the Dow Jones Industrial Average was 16 percent below its level on the Friday before Mr. Obama took office. At this point in Roosevelt’s presidency, 54 days in, it was up 35 percent.

The “Obama bear market,” as conservative commentators have gleefully labelled it, has been blamed on two things: on the new president trying to do too much, and on his failure to do more. There is, paradoxically, truth to both assertions.

Conservatives have attacked Mr. Obama’s budget proposals as a wealth-destroying combination of increased government intervention and higher taxes. In truth, he had long promised to spend more on health care and alternative energy and to raise taxes on the rich, so little in the budget should have surprised investors. 

A bigger dent to confidence comes from Mr. Obama’s style, not his substance. His many backers on Wall Street had taken his conciliatory manner and selection of centrist economic advisers as evidence that he would govern moderately despite, as a senator, having consistently voted on the left. They have been taken aback by his combative tone. On February 28th, for instance, he declared that “special interests and lobbyists” were “gearing up for a fight [and] so am I.” Earlier, he said bankers could not take their bail-out money and “pad their paychecks or buy fancy drapes or disappear on a private jet.” Bankers fear this demonisation is driving down their share prices. Confidence has also been rattled by plans to pass a bill letting unions organise without a secret ballot.

But the Obamabears’ biggest fear is that Mr. Obama’s remedies are not up to the task of fixing America’s deepening recession. To be sure, Mr. Obama’s team has had a huge $787 billion stimulus package passed, begun evaluating banks’ need for more government capital, and unveiled a plan to reduce mortgage foreclosures. But in the meantime, the outlook has deteriorated sharply and the administration has still not decided how to get bad loans off banks’ balance sheets. Andrew Grove, the former chief executive of Intel, the world’s biggest microchip-maker, advised Mr. Obama this week to “rein in the chaos” of differing financial fixes before moving on to health care and energy. Critics say Mr. Obama is trying to do too much at once.

Administration officials appreciate the urgency for action. In his budget, Mr. Obama said he may need another $750 billion to stabilise the financial system, though the popular perception that the $700 billion has achieved little decreases the chances of his getting it. Tim Geithner, Mr. Obama’s treasury secretary, reportedly abandoned plans for a “bad bank” to get distressed assets off the books of the financial system and help restart lending because of the political cost.

Mr. Geithner’s own efficacy has been hamstrung by the fact he remains his department’s only Senate-confirmed official: 17 other top Treasury jobs requiring Senate approval remain vacant. In 2007 the Treasury website listed 120-odd officials, from Hank Paulson, the then treasury secretary, down. The current version of the same webpage lists just one: Mr. Geithner. Candidates for the top jobs have been delayed or discouraged by Mr. Obama’s gruelling background checks, made more so by Mr. Geithner’s own tax problems, and the cloud over anyone who worked on Wall Street, meaning most of those with practical experience relevant to the crisis.

All this has left foreign officials and domestic bankers frustrated at the lack of consultation from the Treasury. Some foreigners say planning for the G20 meeting in London next week is being affected. “They’re overwhelmed,” says Ken Lewis, chief executive of Bank of America. The administration disputes this but admits unprecedented demand for Treasury officials’ attention.

Whatever the cause, the strain on the Treasury is encouraging the view that Mr. Obama’s agenda is being driven by political advisers and Congressmen, both more attuned to voters’ rage than to market confidence. Chris Dodd, who faces a battle to retain his Connecticut Senate seat in 2010, inserted tough new restrictions on bankers’ pay into the fiscal stimulus package despite the administration’s objections. Since then, a series of mostly small banks have said they will return bail-out money, frustrating the plan to increase the banking system’s capital and lending capacity.

For their part the Republicans have been able to shift the debate away from the need for government spending to dodgy examples of it. The Democrats had to fight hard to pass a $410 billion bill to finance the remainder of the current fiscal year this week, in part thanks to blistering attacks by Republicans on its 8,500 “earmarks” — pet projects inserted by legislators — though they total less than $8 billion.

William Galston, a former aide to Bill Clinton, this week advanced two “equally depressing” theories for why Mr. Obama’s team has not more forcefully addressed the crisis: “Either they do not know what to do, or they do not believe they can muster the political support to do what they know needs to be done.” He advised Mr. Obama to focus his attention on the crisis, or risk the loss of confidence Jimmy Carter suffered three decades ago. That would bring Obamabears out in droves.