Obama’s biggest mistake

The most visible sign of whether the economic initiatives of President Obama work will be the recovery of the banking sector.

However, the personnel choices to date in the Treasury Dept. presage a continuation of the failed policies of the Bush administration.

The Troubled Asset Recovery Program (TARP) was the equivalent of a “poison pill” left by Bush to reward speculators who practically demolished the nation’s financial health.    It suspended economic theory by helping troubled banks get bigger and mixing troubled brokerages with troubled banks.

I predicted in November that combinations like Bank of America’s acquisitions of Countrywide and Merrill Lynch, both with government prodding, would magnify the problems, not solve them.  McClatchy Newspapers reports that most of the toxic assets are held by just five big banks.  http://www.mcclatchydc.com/227/story/63606.html

The congressionally-appointed monitor for TARP, which was allocated $700 billion in the weeks before the November election, has noted that there has been no accountability for how or why the first $350 billion from the fund was spent in the last two months of the Bush administration.    In addition, the banks who received the money did not make any commitments on compensation policies or to resume lending.

Now AIG’s greedy derivative traders have embarrassed the administration by grabbing $165 million in bonuses.  The Office of Financial Stability in Treasury should have been the entity to stop that outrage.

TARP’s administration did not address the impact of racial discrimination in the housing mortgage market or the abuses of sub-prime lenders.

Given that record, it is remarkably stupid that the only Treasury official held over from the Bush adminstration is the architect of TARP, Neel Kashkari.  That’s akin to keeping Dick Cheney on as an advisor on intelligence policy.

Many analysts believe that the way Obama handled the TARP mess before the election was the inflection point that convinced Americans he was up to the job.    His first test with Congress was a vote to allow use of the second $350 billion.

However, if he wants to keep the use of Camp David and Marine One, he needs to clean house in the Office of Financial Stability before Bush’s folly becomes Obama’s albatross.     A new regime must take on the rapid breakup of the huge financial conglomerates.      A Citibank split into a dozen regional banks would rapidly recapitalize and restore competition and energy to lending markets.  The offshore subsidiaries which created all the toxic assets should be allowed to go bankrupt.

As she did last year, FDIC chair Sheila Bair is the only person talking sense, as she indicated that such steps might be necessary in a 60 Minutes interview.   Once no institution presents a systemic risk to the market, the entire economy will rebound.

As long as Kashkari continues throwing money to foreign investors of bad loans, the confidence in the administration will sink.    All of the other many positive steps of the Obama administration will be panned because he didn’t make the one change which would really make people believe.

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