What Should President Obama And Prime Minister Brown Discuss?

I’d like to imagine that President Obama and Prime Minister Brown will this week discuss how the global economy is worsening, and why all official forecasts need to be revised down substantially, again – with immediate implications for stress tests in the US and realistic bank recapitalization in the UK. 

But this is a stretch.  On the US side, too much public effort over the past week has gone into repainting a rosy baseline – e.g., in Chairman Bernanke’s testimony last Tuesday and the budget documents unveiled on Thursday.  No leader can back away so quickly – even in private – from this kind of thinking, no matter how much they now begin to worry about the latest haphazard rounds with Citi/AIG or the worsening of financial markets around the world.  Both Obama and Brown are unfortunately stuck, for the time being, with Wait And See approaches.

So, over on Forbes.com, Peter Boone and I suggest some more plausible topics for their conversation.  Naturally, I would start with the eurozone…

15 thoughts on “What Should President Obama And Prime Minister Brown Discuss?

  1. Hi!

    It keeps occurring to me that there is a third alternative that fits between fully nationalizing the banks and just them bailing out but leaving them private.

    Create a permanent, national retail bank. This bank would loan to the public using fully transparent ‘open source’ loan policies, at say, prime-rate + 3%.

    The +3% allows private banks to compete and undercut the national bank if they choose to lend. But if they decline, as is the case today, the national bank provides a ‘liquidity backstop’ to keep money flowing.

    The loaning rules need to be fully open and transparent to prevent political tampering, maybe even opening all national loans to public disclosure for all to see. And probably some sort of judicial system to resolve issues and keep things fair.

    I haven’t heard of any such ideas proposed – am I just not seeing something?

    And apologies in advance for going ‘off-topic’ and hijacking the thread – I just want some venue to share this idea and can’t find an appropriate place short of starting my own “Dave’s crazy ideas” blog..

  2. I think the common thread between all the financial woes is the falling property values. Remember “toxic assets” weren’t exactly “toxic” until property values dropped, because the banks didn’t care if borrowers defaulted.

    When property values hit bottom, and I think some indicators point to us seeing the bottom very soon based NAR data, I think that’s when we’ll see things turn around.

    I agree with you on the lending rules. Going forward, lending practices MUST be legislated and regulated, even for commercial lenders. Especially if lenders are not going to be expected to be culpable for their screwups.

    So I guess you could say I’m in that crowd that says “just get the banks by until the housing market begins to recover.” Then lay down the law.

  3. They should discuss this notice: a full page ad in the NYT signed by General Tso (4 star General of the People’s liberation army of China, Special Counsel to the Premiere), Chief of the CMF [china monetary fund]? (He’s NOT even an economist! what’s up with THAT?)

    Dear United States Treasury,
    The global imbalance created by unsustainable and imprudent American economic choices and evidenced by the present collapse of asset prices is threatening the global macro-economy. The CMF has been a long standing supplier of fiscal stability and revolving credit to the US over many decades. And, as the US administration is aware of the terms therein providing for the unilateral invocation our Fiscal Prudent Use clause underlying such funding, granting China the right to demand injunctive relief as to the sound fiscally prudent use of the same…….now in accordance of which right of sufficient notice we hereby demand,
    1) That the US stop monetary easing and fiscal stimulus with IMMEDIATE effect.
    2) That the US Treasury balance it’s budget by the end of 2009.
    3) That the Department of Commerce LOWER minimum wage to globally compatible standards, and/or allow unlimited temporary worker visas under a program legislated by June of 09, to enhance the export productivity of it’s ailing industry.
    4) That the FED, raise its ‘Fed Funds Rate’ to 3% on overnight deposits with IMMEDIATE effect.
    5) Any and all imports to the US are to be cleared by the CMF Prime Fund Deployment Monitoring Commitee
    specifically, the US shall not allow imports of any kind, including semiconductor equipment, foodstuffs, oil or energy supplies, until preapproved by said CMF committee, in accordance with sustainable debt maintenance.

    Failure to do the same shall result in sanctions:
    A) expropriation of overflight rights by Chinese National Airforce over the territorial US including Puerto Rico and Alaska.
    B) a naval blockade and consequent cessation of all international bilateral trade.
    C) Forcible payment in kind, as agreed by the International court of arbitration, of missile guidance system technology, stealth radar evasion materials blueprints, and any other such commodity deemed to be of value at the discretion of the CMF.

    Have a nice day.
    General Tso ;)

  4. PS. (sorry forgot the most important one)
    D) that labor standards be modified to remove healthcare and bloated pension liabilities not compatible with current CMF debt sustenance.

  5. Kiers, nice :-).

    On a more serious note re: Europe, isn’t a bailout fund a flimsy stop gap measure that is only going to make things worse if it really becomes necessary (e.g. with out putting a fine point on it: Germans bailout Greeks, and the Greeks keep on spending)?

    Isn’t the fundamental underlying problem that:

    (i) the Euro is a currency union that is not backed by a fiscal union — i.e. Brusells has no power to levy taxes, and clamp down on excessive spending in member states, and

    (ii) the principle of regulation of financial institutions by the country of origin, and the mutual recognition of regulatory decisions mean that there is no effective lender of last resort for EU wide financial institutions?

    Wouldn’t it be more effective and efficient to address the real problem?

  6. Bottom line: it no longer matters what Brown and Obama talk about. Brown was utterly discredited long ago. While Obama has managed to spend all his “credibility chips” in record time.

    This from Fareed Zakaria CNN GPS show on Sunday 1 March 09…

    Martin Wolf, Chief Economics Commentator, “Financial Times”:

    “I think we have to recognize this is a very serious problem we’re now in. We are in a major, massive global downturn with a real prospect of getting out of hand.

    “Everything is going very badly. The shrinkage of world output is terrifying. And I think this is an event which can only now be compared with the ’30s.

    “Everything has turned out worse than anybody expected, even the most pessimistic people a year ago. It’s important to remember how much worse it is now than even the most pessimistic, like my friend Nouriel Roubini, thought it would be now.

    “Against that background, we — I suppose this may have been a fond expectation — hope that the new team — very intelligent people, completely free from the taint of the past — would take hold of the situation and take action so decisive, so comprehensive, so ruthless, that it was clear that, on the worst case scenario, it was going to be turned around.

    “I think all the segments they’ve dealt with, the three things they’ve dealt with — the stimulus, the financial package, the home situation — they’re the right segments.

    “But in every case, the policy has been far too cautious, far too politically constrained. And it’s not going to shift expectations. And that’s absolutely obvious it’s what the markets have concluded, and it’s what the world’s concluded.

    “And I fear now, that this tremendously important opportunity to turn things around has been lost. And that means we may have a really dreadful situation in the world economy — and the whole world, therefore, politically, as well — over the next few years.

    “So, I think they failed to seize the initiative.”

    This is from today’s Telegraph (UK)

    “Simon Denham, managing director of spread-betting company Capital Spreads, said: “The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment.”

    “The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.

    “David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election.”What a waste of a decade that was,” he said.

    And this from Bloomberg: “Stocks fell worldwide, sending the Dow Jones Industrial Average below 7,000 for the first time since 1997, and Treasuries rose after Warren Buffett said the economy is in ‘shambles’”

    A vital step towards recovery is to move beyond denial. Communication is not what we say, Mr President, it is everything we do. Until our “leaders” display the moral courage to face reality, we can not begin.

  7. Hi Ryno, thanks for responding.

    I sure hope you’re right, but from my point of view, the catch-22 (aka ‘property value death spiral’) is that Banks won’t loan against an asset who’s value is declining, but property values won’t stop falling until banks start lending again.

    I’m just a lowly unemployed computer programmer not an economist but for what it’s worth, I think that there’s a structural change underway where risk pricing will never be low again. No matter how you look at it, the era of using cheap Chinese savings to fund our (housing) over consumption has to end sooner or later.

    Thus the need for a national retail bank, it will end the death-spiral and add stability to the debt market long-term.

  8. OK…I think they are already preparing for “the unthinkable” but no one really has a scenario that is guaranteed to work. I personally love the idea of boldness. Why is this not catching on more?

    Obama and Brown: Helping them strategize on how Europe can wake-up sounds a bit like a fool’s errand–who really likes to be told to wake-up? Should they slap PIIGS around? :) I’m only kidding but really…I think it would be great if you and Peter could be more tactical in your suggestions to Obama and Brown.

  9. From Boone and Johnson:

    “To help resolve this, an E.U.-wide fund is needed to support nations under pressure. This should be matched with appropriate fiscal tightening in problem countries, more relaxed fiscal policy in the core stable countries (e.g., Germany) and much looser monetary policy in the E.U. overall (including, but not limited to, the European Central Bank). Obama and Brown should strategize on how they can get Europe to wake up.”

    Yes – with this caveat. Rather than sitting down and trying to figure out how small it can be and have a chance of working, take what you really think might be necessary – then double it.

    Obama – the half-step President – needs to do the same. Talking bold without bold action is killing us. Making claims without backing them up has wiped out his credibility – so much so that now anything he proposes or does will have half the chance of getting us out of this. Average Americans look at the stimulus, and can’t decide if they should laugh or cry.

    So Team Obama should estimate a _worst_ case scenario, consider what would be needed to get out of it, and then double it. Because everyone expects half of what they promise.

    And I think it’s too late – I truly do think that as of about last week, perhaps the week earlier, it was game over. Make no mistake. This catastrophe was not inevitable. We could have fixed it before, during, and even immediately after the crisis started. Our collective failure to act – not unlike our collective failure to act whenever we as a nation have been confronted by anything except a war – caused this.

    On the plus side, global CO2 consumption may actually decline year over year. :) (Unfortunately, our hopes to stop deforestation and other catastrophes will be wiped out by abject poverty. Africa is toast. It’s going to be (already is) horrific. Latin America might be better off, they have a more entrenched civil society. Obama, if he had some sense, would be better off directing the billion that’s going to the Palestinian Authority to an Amazon preservation fund. We’re getting to the point where the system is going to become so dysfunctional that we may end up returning to elements of a command economy (as we had in WWII).

    I wonder if the Pentagon is revising its plans to invade Canada yet?


  10. Hi Simon,

    so is it time to call it for what it is or even update the baseline? i.e. will the shape of your ‘recovery’ change from L to D?

  11. My 2 cents
    Banking crisis, divide failing banks along state lines. Select the managers from the best of those available in each state. Fire the present big bank management.
    Sell off all brokerage operations.
    Any branches out side the country, give to the host country to deal with.
    AIG, same approach.
    To big to fail is fixed. Some of the worst states may let there portion of the big mess fail.
    Stock holders and bond holders will get new shares from each new entity.

  12. if he may be asking Brown for a matching commitment:

    “President Barack Obama is drawing up a plan to subsidize the profits of big private investment firms in bond markets. As much as $1 trillion could be spent for guarantees to hedge funds and private equity firms so they will continue buying securitized consumer and business loans.” http://industry.bnet.com/financial-services/1000440/financial-roundup-obama-to-guarantee-private-equity-probe-bank-chiefs-directors-cramdowns-lightened-up/

  13. The below system will keep the loans transparent:

    Capital markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable. By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day? So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days. The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one’s investments every 7 days (based on the specs you give the agent). A system like this will make the financial markets work as smoothly as the local fruit market.

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