The British newsweekly, The Economist, is published globally. Last fall, it endorsed Barack Obama.

The endorsement recognized his lack of experience, but argued that he was the better of the two choices, and the fact that the United States would elect its first African-American president would favorably influence world opinion of America.

The current edition is highly critical of Obama’s three-pronged rescue package for the economic crisis: “Alas, that opportunity was squandered. Mr. Obama ceded control of the stimulus to the fractious congressional Democrats, allowing a plan that should have had broad support from both parties to become a divisive partisan battle.” The result is that too much of the stimulus is back-loaded, to be spent after 2010, and “larded with spending determined more by Democratic lawmakers’ pet projects” than with effective measures to stimulate the economy. These words parallel criticisms leveled by Tom Coburn and James Inhofe, but now with a world-wide audience.

The Economist states that managing public expectations is part of building confidence for the future. The administration must recognize this, or be seen as part of the problem. Obama told a crowd in Elkhart, Ind., Feb. 9, “If we don’t act immediately, our nation will sink into a crisis that, at some point, we may be unable to recover,” a statement The Economist strongly disapproved. Household savings rate in the United States was a negative in 2007. In 2008, it rose to 3.6 percent of disposable income and for much of the post World War II era averaged around 8 percent. For the period 2009-11 it is expected to exceed 8 percent as Americans, fearful of their economic future, spend less.

On Feb. 10, treasury secretary Tim Geithner announced plans to use the remaining funds in the $700 billion Troubled Asset Relief Program (TARP), now renamed the Financial Stability Plan (FSP). The Economist wrote, “his plan is more a statement of intent than a concrete proposal, lacking crucial details.” Geithner hopes to attract buyers for $2.5 trillion of troubled bank assets with some sort of government “guarantee” at prices lower than banks are willing to sell. His new plan would restrict bank dividends to shareholders to a penny, requires banks to step up mortgage modifications, and bans acquisitions of healthy competitors until the government loan is repaid. The puzzle is to price each troubled asset in a way that works for the banks, venture-investor and the taxpayer.

The International Monetary Fund (IMF) database lists 124 countries as having systemic bank crises since 1970 where their banks were mostly insolvent – most of them smaller developing nations. However a few were rich developed nations like Japan in the late 1980s, Sweden in the early 1990s, and South Korea in 1997. All involved deep recessions, required government intervention to clean up the insolvent banks, and led to big increases of public debt. But the speed of recovery differed dramatically. Japan suffered a decade of economic stagnation with a growth rate of about 1 percent. South Korea recovered in less than two years, and Sweden recovered quickly as it acted fast in removing bad assets from banks’ balance-sheets and recapitalizing or nationalizing where necessary. Japan was slow to clean up and recapitalize its banks and enacted a tax increase during the 10-year recession.

The mess in America is as big as Japan’s – and in some ways harder to fix. As the world’s biggest debtor, America headed into the bust in a very different position from Japan, a creditor nation rich in domestic savings. In America, private-sector debt soared from $22 trillion in 2000 (222 percent of GDP) to $41 trillion in 2007 (294 percent of GDP). According to the IMF, non-performing loans in Sweden hit a high of 13 percent of GDP, and in Japan hit a high of 35 percent of GDP. According to a recent estimate by Goldman Sachs, in the United States today it is just under 40 percent of GDP.

Virtually all the rise in non-financial debt since 2000 has been in American households as they tapped into the rising equity in their homes. house prices doubled in many areas in five years. Congress pushed for more Americans to own their own home, and money was lent to buy with no money down to low-income borrowers – some on welfare, courtesy of Fannie and Freddie. In 2007, the twin bubbles of rising house prices and a credit boom collapsed.

Obama announced a so-called mortgage rescue plan of $275 billion to keep low-income families in their homes. It raises the issue of fairness, since 93 percent of all mortgages are not in default. Of those mortgages already modified to reduce payments, just under 60 percent have re-defaulted. Sale of single-family homes has improved in the past year and the inventory of unsold homes fallen. Obama’s mortgage rescue plan is highly controversial.

A reader last week e-mailed me suggesting a wider distribution for these Friday columns. One way to do this is by the Internet. This column is e-mailed to The Banner, and to about a dozen friends in five states. Some forward it to others on their mailing lists. If you would like to join this group, please reply to have your name added.



George Porter is a retired insurance company executive and a Duncan Banner columnist. He may be contacted at geo.porter@att.net.

Recommended for you