Obama’s New Move

When President Barack Obama recently submitted his budget proposal to Congress, he also inserted a contingency for another $750 billion for more bailout funds. Had Obama stayed on that path, Congress would have been required to debate and to consider approving that additional sum. But those plans have now gone down the tubes.

The Washington anger over AIG bonuses has now spread throughout the country like a plague. This has made it functionally impossible for Obama to publicly secure a Congressional stamp of approval for the hundreds of billions of dollars of additional money that his administration needs to stimulate the purchase of currently unmarketable asset-backed securities. Should he attempt to obtain Congressional approval now, he will incite even greater outrage among Americans.

The administration’s solution is crafty: Make an end run around Congress by devising a plan which can be implemented through the executive branch. This removes the arrangement from public debate and the need for approval by the legislative branch.

Congress thus gets handed its own special bonus by being absolved of responsibility. No more personal embarrassment for the likes of Nancy Pelosi, Harry Reid, Chris Dodd, Barney Frank, Charles Rangel, etc.

President Obama’s revised plan will rely heavily on public-private partnerships which will require the full voluntary participation of Wall Street hedge funds, pension funds and insurance companies. Therefore, look for the Obama administration to tone down its rhetoric about corporate bonuses.

Why? Because the managers of Wall Street firms which will be requested to participate in the program will pick up their marbles and leave the playground, if their yearly bonus checks or alternate forms of compensation are at risk. To succeed with his new plan, President Obama needs Wall Street, but he can’t go public with that admission. Ironic, isn’t it?


NEXT: The Obama administration’s new stimulus plan.

Too Smart for Their Own Britches

On October 23, 2008, former Fed Chief Alan Greenspan appeared before the House Committee on Oversight and Government Reform to testify about the recent credit freeze caused by the sub-prime mortgage mess. He read from a prepared text and then took what were mainly softball questions from committee members.

I pored over every word contained in Greenspan’s written testimony before that committee. I also listened carefully to Greenspan’s response to questions from the House panel. This is a man of great intelligence who simply cannot sit before other people and express in common language what he did and why he did it.

Greenspan was a key factor in causing the credit markets to fall apart. He kept interest rates too low, too long, and refused to introduce regulatory measures that might have kept the house of cards from crumbling. His written testimony was more like an excuse than an explanation. I won’t bore you with all of the 50-cent words that he used as a shield.

Greenspan’s basic and most absurdly memorable explanation for the sub-prime fiasco was to state its cause as originating from, “A flaw in the model that I perceived is the critical functioning structure that defines how the world works.” Huh! Is he kidding? Please read that quote again. With a straight face, Greenspan told everyone within earshot not only that there is a complex mathematical computer model that defines how the world goes ‘round & ‘round, but that the model is a financial one. How overly simplistic!

It appears that while he was Fed Chairman, Greenspan placed great faith in economic models. Although he did not specify in his testimony the one to which he referred, there are several candidates. One is known by its abbreviation, CAPM (The Capital Asset Pricing Model). Another is the Black–Scholes model. Developers of both received Nobel Prizes for their work.

Greenspan defended the use of computerized risk management models which became the backbone for the trading of mortgage-backed securities. Heck, he testified, there was nothing wrong with them; it’s just that people didn’t feed in the right data.

So many smart people, so little wisdom. Have I said that before?