On Tuesday night President Barack Obama gave, yet again, an upbeat, awe-inspiring speech about a new beginning. You've no doubt read the text or at least heard the sound bites.
But what does it mean to the financial world? Precious little.
Full disclosure here. I voted for Obama. And if you read my story the day after he was elected, you would know I'm deeply happy, if mildly surprised, that he is the US president. I want nothing more than to see him succeed.
But I don’t hold my breath. Let's start with the financial world. On the day of the inauguration, Bank of America, the biggest US lender by assets, watched its stock drop 29% to $5.10 on concerns that the company needs at least $80 billion to restore capital to adequate levels. This news far overshadows any speech. Meanwhile, the second-biggest US bank by assets, Citi, witnessed its share price fall 20% to $2.80 in regular trading.
Stocks should have all been stable or up – buoyed by the good news of the end of the Bush era and a fresh start. But even Obama's beautifully crafted inauguration speech promising change on all fronts couldn't save the day.
And that's because the problems are so deep, and so out of his control, we now need more than just words to turn things around. But ironically, my guess is that words will also be used to hurt him, as the world’s media uses the power of commentary to turn public opinion against him.
In my mind there are two types of journalists: Those who took up the pen in some wind-swept and interesting pursuit of always being critical without having to actually do anything. Weaned on the Hunter S Thompson school of journalism they see the world through grey-tinted lenses coated in sarcasm. These journalists are back in a pub, waiting patiently for Obama’s first mis-step so they can fire off a barrage of "no we can't" articles.
The second type of journalist doesn’t thrive on failure, but has witnessed so many lies and horrors, that they have become jaded for self-protection. They may be singing Obama's praise now, but once the confetti is swept away, and the day-to-day work begins, they will take up their natural tone, which is to assume the press secretary is spinning lines (and let's be honest here, if you were to define spin it would be (1) 50% our side of the story, 50% selectively ignoring other facts; (2) lying).
So the media, which is currently Obama's ally, will become his foe, and that will cause damage. But even if the media had no sway over popular opinion, popular opinion will no doubt turn against Obama. That's because his constituency is hurting or will be hurting. Obama has inherited a mess both on the domestic and international fronts, and cannot be expected to solve all the problems overnight. Yet, people will expect just that and will quickly lose patience if they don’t see improvements, especially (or even solely) on economic and social issues. If you lose your job and have no hope of finding one in your immediate vicinity, if you lose your house because you can't pay your mortgage, if you run up an enormous credit card bill that you'll be paying until you retire, if you can't actually retire, you're not going to re-elect this president.
Constituents aren’t going to be happy that their way of life must change. The reason we're in this mess is because so many people used their homes like ATM machines and thought credit cards were a license to buy above and beyond their earning capacity. The basic maths lesson will be learnt, but by the next generation (which will grow up understanding what Chapter 11 means), not this one.
But there is still hope
The financial mess is fixable; but it will take time. And it will be painful. My hope is that Obama fully realises this. His proposed $825 billion package of federal government investments that includes dozens of spending measures ranging from $200 billion in fiscal relief to help state and local governments, to $6 billion to extend broadband to rural areas (a 21st century version of Depression-era rural electrification) may be a kick-start to the economy but it won’t fix things immediately. Two-thirds of the total value consists of spending, with one-third for tax cuts – the spending will take time to trickle down, and the tax cuts won’t be long-remembered by voters.
So what Obama needs to do is to act not like a politician, but be daring. If he does his job with no hope of re-election – makes tough choices that are for the long-haul and not the short-haul, the world will be a better place. That means letting the Big Three automakers fail, so that a new industry with no legacy costs and a goal of creating an alternative vehicle that uses no petrol (As in zip, nada, none; not less) can be created. In one extremely painful move he will erase wars with unions, and possibly wars in the Middle East. He will also create a rust-belt with no immediate job prospects, which would ensure no re-election.
Obama needs to sort the housing problem. There were 2.25 million home mortgage foreclosures last year. Worst of all, one out of every six homeowners owes more on their mortgage than their house is worth. Giving homebuyers a tax credit and buying up foreclosed mortgages is a start, but again, it's going to take time to sort that mess.
The Obama team has suggested ways to use some of the remaining funds from the $700 billion bailout programme that was passed in early October for handling the housing problem. One idea is to commit $50 billion to $100 billion to reduce the number of preventable foreclosures. There’s two political problems there: (one) sadly, that won’t be enough and (two) it’s going to really irritate people who didn’t over-leverage themselves to see their neighbours bailed out. But it may need to be done. Given problem number one, Obama is going to have to force banks receiving bailout assistance to implement mortgage foreclosure mitigation programmes rapidly (this is in the works, but it needs to be stepped up, pronto). That won’t help the share prices of those banks, which will lead to a repeat of the abovementioned problem number two. It is going to really irritate people who didn’t over-leverage themselves AND own bank stocks.
In the banking sector, Obama needs to force more draconian measures alongside the bailout money. The banks are effectively nationalised already, but to go the full hog is to invite the intrusion of American bureaucracy. That means the best and the brightest won't want to become bankers. At the same time, the best and the brightest need to be reined in. The age of masters of the universe needs to end and bankers need to become servants of the universe – people who are well paid for acting prudently and responsibly as bankers should, not paid mind-numbing figures for outsmarting the regulators, rating agencies and auditors. That means, this bailout money needs to come with a mighty big stick. Don't nationalise the banks, just control them. Indeed, a few indictments may be in order. The ever-so-nutty Jim Cramer recently invited Obama to call him and ask who on Wall Street should be indicted or fired. Such a call might be worth making, but, in the end, it won’t get Obama re-elected.
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