By William Patalon III
Executive Editor
Money Morning/The Money Map Report
After a week of spiraling impatience and stinging rebukes – including allegations of incompetence – the Obama administration is going on the offensive in an attempt to rebuild confidence in its ability to lead the country out of its seemingly depending financial morass.
Just a few short months after he rode to victory on groundswell of good feeling and optimism, U.S. President Barack Obama appears to have already had his “honeymoon period” and is now fighting a rear-guard action. He’s being hammered for overspending, and for failing to halt bonus payments to the executives of bailed-out firms.
The voters who elected Obama want proof that he’s in control, that he really understands what’s happening, and that he has a plan for getting the country out of this ongoing mess. But their confidence was shaken last week – and with good reason, critics say. For instance:
- It failed to halt $165 million in bonuses doled out by failed insurer American International Group Inc. (AIG).
- It underestimated the budget deficit it would be facing – by $2.3 trillion – and that’s a “best-case” scenario.
- And there are major questions about the Obama administration’s plan to expand a new U.S. Treasury Department/U.S. Federal Reserve program designed to boost consumer lending – by paying several investment management firms to match private-sector money and buy troubled assets.
This still-new administration is still hoping to achieve a tenuous balance – somehow branding itself as a guardian of the U.S. middle class, but without alienating Corporate America, Forbes reported.
Last night (Sunday), with an appearance on CBS TV’s “60 Minutes,” President Obama granted his longest interview since taking office.
Tomorrow night (Tuesday), President Obama will go directly to the people in an attempt to blunt this growing discontent, hosting a nationally televised press conference that will start at 8 p.m. EDT. Forbes reported that Obama will also use that opportunity to make his case for the Treasury’s “risky gambit” to partner with the private sector to get bad assets from bank balance sheets.
Given his track record, President Obama is virtually certain to have administration officials make multiple media appearances to bolster his message.
Despite the incongruous nature of the plan, and its risk, it actually might work out well. According to The New York Times, the plan will have three key parts:
- The Federal Deposit Insurance Corp. (FDIC) will lend investors about 85% of the money needed to the buy toxic securities from banks that want those assets taken off their balance sheets.
- The government will pay the chosen asset-management firms to match the private-sector money to expand the existing Treasury/Fed program.
- And the troubled assets will be priced via some sort of auction.
If he succeeds, President Obama will show that he’s about more than just more government spending – the private sector will have to play a major role, as well.
Market Matters
Last week, after the American public displayed a collective outrage over the $165 million in bonuses paid to AIG execs – many who played a major role in the global financial conflagration – the U.S. House of Representatives passed a grandstanding bill that would impose a 90% tax on these ill-gotten gains (as the U.S. Senate worked on its own version). AIG Chief Executive Officer Edward M. Liddy felt the wrath of Congress and promised to ask his employees to return half of their bonuses.
New York Attorney General Andrew M. Cuomo received a list of the bonus recipients, but resisted posting their names because of threats made on their lives (though one Senator merely suggested suicide). President Obama took the opportunity to chat it up with the American people on NBC’s “The Tonight Show With Jay Leno,” mixing in his personal outrage with a few tips on the NCAA tournament.
While the bonuses raised quite the stir, the bigger – and less-talked-about – issue was the $90 billion that AIG paid to domestic and international banks after receiving a federal bailout, an amount that was the equivalent of half the taxpayer money it received.
In reality, Goldman Sachs Group Inc. (GS) and others were bailout beneficiaries themselves, though their identities were hidden through the AIG hardships.
While AIG dominated the headlines, life went on in other corporate boardrooms:
- Alcoa Inc. (AA) cut its dividend to accommodate the reduced demand for aluminum.
- And earthmoving-equipment giant Caterpillar Inc. (CAT) announced plans to lay off more than 2,000 employees.
| Market/ Index |
Year Close (2008) |
Qtr Close (12/31/08) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
8,776.39 |
8,776.39 |
7,223.98 |
7,278.38 |
-17.07% |
|
NASDAQ |
1,577.03 |
1,577.03 |
1,431.50 |
1,457.27 |
-7.59% |
|
S&P 500 |
903.25 |
903.25 |
756.55 |
768.54 |
-14.91% |
|
Russell 2000 |
499.45 |
499.45 |
393.09 |
400.11 |
-19.89% |
|
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
|
10 yr Treasury (Yield) |
2.24% |
2.24% |
2.89% |
2.63% |
+39 bps |
Economically Speaking
At last week’s policymaking meeting, the Fed’s Federal Open Market Committee announced its intent to purchase as much as $300 billion in Treasury securities and also detailed a $750 billion plan to stabilize the mortgage-backed securities market. In the post-meeting statement, the policymakers warned about near-term sluggishness and higher unemployment, but offered some confident comments that the enhanced consumer activity would help in the months to come. Fed Chairman Ben S. Bernanke even took this somewhat “optimistic” message directly to the people by appearing on “60 Minutes,” where he again projected an end to the recession within 2009.
Last week’s data did more to confirm the economy’s near-term sluggishness than it did to bolster any optimism about a recovery.
Industrial production, a measure of manufacturing activity, dropped in February for the fourth straight month and stands at the worst level in 50 years. While housing starts increased after seven consecutive months of declines, the eternal pessimists point out that construction activity remains almost 50% below last year’s levels. Still, all regions of the country (outside of California and other Western states) reported stronger activity, as construction of new homes and apartments surged more than 20% in February.
Total claims for jobless benefits climbed to the highest level on record, as workers continued to move in droves to the unemployment lines and, unfortunately, they are staying there for longer-than-normal periods of times.
On the inflation front, the producer price index (PPI) rose for the second straight month as energy prices climbed in February and as early fears of deflation continued to subside. The consumer price index (CPI), the retail inflation gauge, also rose as drivers have begun spending a bit more at the pumps (just in time for those spring break travels).
Weekly Economic Calendar
| Date |
Release |
Comments |
|
March 16 |
Industrial Production (02/09) |
Worst showing for manufacturing on record |
|
March 17 |
Housing Starts (02/09) |
Surprisingly high jump in activity across the country |
|
|
PPI (02/09) |
2nd consecutive monthly increase eased deflation worries |
|
March 18 |
CPI (02/09) |
Largest jump n consumer prices in 7 months |
|
|
Fed Policy Meeting Statement |
Buying up to $300 billion in treasuries |
|
March 19 |
Initial Jobless Claims (03/14/09) |
Surprising drop in claims, though still at high levels |
|
|
Leading Eco. Indicators (02/09) |
Decline in index not as bad as expected |
|
The Week Ahead |
|
|
|
March 23 |
Existing Home Sales (02/09) |
|
|
March 25 |
Durable Goods Orders (02/09) |
|
|
|
New Home Sales (02/09) |
|
|
March 26 |
Initial Jobless Claims (03/21/09) |
|
|
|
GDP – 4th qtr (final) |
|
|
March 27 |
Personal income/Spending (02/09) |
|
News and Related Story Links:
- Forbes:
Obama’s Big Week. - New York Daily News:
More than a bad day: Worries grow that Barack Obama & Co. have a competence problem. - Forbes.com:
The Next Bubble: Obama's Budget Deficit.
- CBS TV’s “60 Minutes:”
Obama on Public's Anger at Wall Street.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.