Forget the Oath, Obama Needs an Economic Do-Over

The president makes three economic mistakes right out of the gate.

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The four-year term of the 44th American president began with an Inauguration Day "do-over," so to speak. After President Obama and Chief Justice Roberts fumbled the 35-word presidential oath at high noon, they tried again later that evening, successfully the second time around. Now if only Obama could do over his entire first week as president. Turns out the 332-point, Inauguration Day plunge by the Dow Jones Industrial Average was a pretty good harbinger of what was to come. Team Obama made three big economic mistakes right out of the gate:

1) Pushing TARP 2.0. No sooner was Obama sworn in than rumors spread through Washington and Wall Street that the new administration was planning to spend hundreds of billions (probably more) on the First Bad Bank of the United States, a government-financed depository that would buy and and house hundreds of billions (probably more) of toxic securities that are currently a stinking, rotting wound in the balance sheets of the American financial sector. If you hated the Paulson Plan -- at least the first version -- you'll absolutely loathe this pricier sequel.. Frederick Cannon, an analyst at Keefe, Bruyette & Woods, thinks U.S. taxpayers would need to pony up some $3.5 trillion to restore bank balance sheets to health. Certainly at least a trillion bucks seems likely.

But toxic debt purchases, and the even worse idea of outright nationalization, should be abandoned. Already the Bond Market Vigilantes are starting to revolt at the prospective cost of Bailout Nation. U.S. long-bond yields have been heading sharply higher, and David Goldman, former head of bond research at Banc America Securties, notes that 5-year credit protection on U.S. debt is trading at the level of Brazilian debt back in 2007. (Yes, Brazil.) As Goldman explains in his blog, Inner Workings, "Given that the Fed is all in, with $1.4 trillion of dubious junk on its balance sheet, this should surprise no-one." A better solution: Suspension of mark-to-market accounting rules. Indeed, the Group of 30, made up of academics and former central bankers, recently put out a report on financial reform that hinted Washington should be doing just that.

2) Taking a poke at China. Timothy Geithner, our probable next treasury secretary, decided to take a swipe at China -- the folks who are supposed to be buying a good chunk of the trillions in new debt that the Obama administration wants to float in coming years -- for manipulating its currency. Now first, Obama should be praying that the current economic slowdown in China doesn't lead to political chaos in the Middle Kingdom. It already appears that economic activity there has fallen off the cliff and unrest is rising. Second, helping shepherd China to being a full-fledged democratic-capitalist nation is what Geithner should be focusing on and talking about.

Here's how JPMorgan Chase economist Jim Glassman puts it: "China isn’t manipulating, it’s managing its currency to manage its way out of poverty. China’s living standard is 10% of the U.S. level. China isn’t taking advantage of the U.S. If China is successful, it will be able to reform its financial sector, eventually float its currency, and create a new market with opportunity for everyone. We should be cheering China’s progress not complaining about its currency. A stable yuan is a means to a better future for China and for the U.S., too."

3) Pushing the Wrong Stimulus Plan. It's becoming clearer by the day that if the economy is in as dire straits as Obama says -- the "gathering clouds" and "raging storms" of his gloomy inaugural speech -- then a stimulus plan where the bulk of the spending stimulus doesn't kick in until 2010 and beyond isn't very stimulative. (And if the economy isn't so bad, what's the rush?) But when Republicans meekly suggested cutting the lower two marginal income tax rates, they got a presidential reply of "suck eggs." (Well, more or less.) Heck, economic adviser Larry Summers seemed positively eager on Meet the Press yesterday to eliminate the 2001 and 2003 Bush tax cuts (for everyone it seemed) as soon as the economy shows even the faintest pulse: "I don't think there's any question they have to be repealed. The country can't afford them for the long run. ... As soon as the economy recovers we are going to have to find ways of getting the government's finances under some kind of control."

Yeah, let's raise taxes right as the Fed is yanking away all of its monetary stimulus. Can anyone say double-dip recession? The hard truth for Democrats is that cutting taxes right now is the quickest and most effective way to boost the economy. The economy boomed the past two times we cut the capital gains tax rate and doing so again -- maybe even temporarily eliminating it and corporate taxes -- would increase business investment and boost asset values for millions of American's battered investment portfolios. The confidence deficit would start to disappear.

Bottom line: Obama likes to shoot hoops every now and then. Time for a "My bad," Mr. President, like they say on the courts. Time to try again. Time for a do-over.

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