Obama's game plan is messy and pointless

Barack Obama's 'stress tests' for banks are a classic bureacrat's solution. Messy in the short term, and pointless in the long term.

No president since Roosevelt has been as busy as Barack Obama in his first 100 days in office. He's shifted America's stance on climate change and is trying to reshape US relations with Russia, Iran and Cuba.

As for the economic nightmare he inherited, "every arm and leg of the state" has been "employed to fight for the cause", said Lex in the FT.

No recovery in sight

The backdrop remains daunting. Soon this will officially be the worst recession since the war, noted Floyd Norris in The New York Times. The economy has already shrunk by almost as much from its peak as it did in the 1973-1975 recession, when it lost 6%.

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And while recent data suggest that the economy is "no longer detonating", as David Rosenberg of Merrill Lynch put it, a slower rate of decline is hardly the same thing as a recovery.

This week the Case-Shiller index of US house prices failed to post a record annual decline for the first month since prices peaked. But they still slid by 19% in the year to February.


Stress over stress tests

The crucial lesson of credit busts is that until the banking system is fixed and the supply of credit is no longer squeezed, "the prospects for a real recovery are very limited", as Alex Brummer pointed out in the Daily Mail. And on this crucial issue, Obama and Treasury Secretary Tim Geithner are "off the pace". Not long ago the government announced that it would conduct "stress tests" on 19 banks to see whether they had enough capital for the downturn. The tests apparently ended last week, but the results will only be announced on Monday. In the meantime, leaks and rumours have been flying around, with Citigroup and Bank of America among those deemed likely to need more capital.

What next?

To add to the uncertainty, the stress tests don't look especially onerous and the authorities now appear to be downplaying their significance: banks told to raise more capital should apparently not be seen as insolvent, said Nakedcapitalism.com. "Then what is the purpose of the stress tests, pray tell?" It seems they're just a pretext for the government to persuade us it's on top of the situation, while it is really just hoping we can "grow our way out of the problem" as banks recover along with the economy. Yet with $750bn more in US write-downs likely in 2009-2110, according to the International Monetary Fund (IMF), more capital infusions for US banks have long been on the cards. The tests are a classic bureaucrats' plan, said Lex. "Messy in the short-term and pointless in the long-term."