LAMBRO: Abyss could deepen again

COMMENTARY:

A deepening pessimism is taking root in the American economy as joblessness rises inexorably toward 9 percent, businesses are failing, U.S. exports have tanked and Wall Street is in a depression.

Billionaire investor Warren Buffet declares the economy has “fallen off a cliff,” and sees recovery further off than ever. Economists talk gloomily of a long recession followed by years of anemic growth as the once-mighty global economy shrinks for the first time since World War II.

The administration’s plans to bail out failing banks, buy worthless toxic assets and “jump start” a listless economy now seem tame in the face of a dawning realization that the fierce financial infection is far more systemic than they had first imagined.

Global economic analysts here now talk of bank failures in the trillions of dollars, dwarfing the rapidly depleting $350 billion in TARP rescue funds that the Treasury has at its disposal. The Federal Deposit Insurance Corp. is raising its premiums on the nation’s banks to replenish its shrinking fund at a time when many banks are too weak to pony up more money.

President Obama’s honeymoon, if he ever really had one, is being cut short by new criticism from Wall Street, Republicans and Democrats in Congress and, increasingly, the business community.

Investment strategists complain that Mr. Obama dismisses Wall Street’s pivotal role in the economy’s recovery as he plans to raise taxes on the very investors the country needs to boost stock prices and unlock risk-capital to refinance a cash-starved economy.

“The result has been a capital strike, and the return of the fear from last year that we could face a far deeper downturn,” the Wall Street Journal said in an editorial aptly titled “The Obama economy.”

Leading Wall Street analysts, fearful of criticizing the administration this early, have now begun to speak out more brazenly. I asked David Wyss, chief economist at Standard & Poors, the influential Wall Street research and forecasting firm, whether the market’s plunge was a sign of no confidence in the White House’s recovery plans. He quickly replied, “Yeah, I would say.”

“Part of it is they [Wall Street] feel there’s no there there,” Mr. Wyss told me. “They don’t have [fully worked out] plans. They are still in the formation stage. These guys have been there 45 days, but he promised to hit the ground running and it’s more like they landed up to their knees in cement. A lot of the cement was left there by the previous administration.”

“I don’t think Obama has done the greatest job,” he said.

There is also a growing belief that Mr. Obama is pushing too many domestic spending initiatives at once, attempting to emulate Franklin Roosevelt’s whirlwind 100 days. While the stock market was tanking, the jobless rate was going through the roof, the economy was critically ill, strategic posts at Treasury were unfilled and the White House was holding a seminar on health-care reform. “You’ve got to concentrate on the economy first,” Mr. Wyss said.

Republicans and some Democrats have also begun to question the “too big to fail” strategy that the administration refuses to abandon. “We should have a much more aggressive strategy” toward bad banks, “recognizing that they are broken and selling them off,” said Brookings economic analyst Bill Gale. “Alan Greenspan said nothing is too big to fail. In some cases there is no reason to keep them in play.”

There is a more fundamental weakness in Mr. Obama’s recovery plans - and that is his decision to use the economic crisis as a means to expand social spending at the expense of needed tax incentives to foster growth and investment.

Economist Harm Bandholz at Unicredit Research faults Mr. Obama for doing “nothing to stop the fall in the stock market, nothing directly,” adding that “without the stabilization or recovery of the stock market, the U.S. economy won’t be able to get out of this recession.”

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