It’s a bit like getting your first report card after just a week of school, but Barack Obama’s first 100 days in office obviously haven’t been the usual honeymoon period. When Obama became president in January, the economy had been in recession for 13 months, with no end in sight. Huge banks like Citigroup were still foundering, despite the emergency resuscitation rendered during President Bush’s final months. Big companies were announcing four- and five-digit layoffs. The “D” word—depression—was in vogue.
It’s impossible to turn around the world’s biggest economy in 100 days, but Obama has clearly tried. Since January, his administration has put in place a vast economic-recovery program. The question now is whether it will work. Here’s an early assessment of how Obama has tackled the biggest problems facing the economy:
The housing bust. With so many problems these days, it’s easy to forget that the recession began with a massive plunge in housing values—which continues. And most economists feel the economy won’t rebound until housing prices bottom out and stabilize. So far, prices nationwide have fallen nearly 30 percent from their 2006 peak, with further declines likely through most of 2009.
Obama’s action plan: The $75 billion “Making Home Affordable” program to help qualified homeowners avoid foreclosure.
Effectiveness: Questionable. The Obama administration says the program could help three to five million homeowners avoid foreclosure, which in turn would help stop the plunge in real estate prices. But banks have to go along with the voluntary program, and so far it’s not clear that enough will. Meanwhile, foreclosure rates continue to rise.
How to tell when it’s getting better: When foreclosure rates stop rising and real estate values stop falling. Other indicators, such as occasional monthly increases in home sales, can be misleading, because those can reflect foreclosure fire sales rather than normal buying activity. Many potential buyers are waiting for prices to stop falling before committing to a purchase, and they’re the ones who will help the housing market become healthy again.
[See why Obama is less optimistic than he might sound.]
The bank rescue. The much-derided troubled assets relief program introduced by President Bush and his Treasury Secretary Henry Paulson has accomplished one important thing: It prevented an even worse financial panic than what happened after Lehman Brothers and AIG collapsed last September. Obama’s challenge has been to continue propping up some of the most troubled banks, like Citigroup and Bank of America, wind down AIG, and start nursing the financial sector bank to health.
Obama’s plan: While continuing TARP, Obama’s Treasury Secretary, Timothy Geithner, has also introduced the public-private investment partnership, PPIP, to start buying up to $1 trillion in “toxic assets” from the banks. Unwinding those money-losing securities is essential for the banks to write off their losses, return to profitability, and start lending normally again.
Effectiveness: Too early to tell. TARP has helped stabilize some banks, and a few may even start paying back the money they’ve gotten from the government. As for PPIP—designed to help the most troubled banks—it won’t get fully underway until early summer, and there’s no guarantee it will work, despite generous government subsidies.
How to tell when it’s getting better: When banks start paying back their bailout money, and the Treasury Dept. says no more banks will need a bailout. But it could get worse before that happens. And it’s still possible the government may have to completely take over a few big bank, which would be a clear sign that the PPIP didn’t work.
[See why recent bank profits don’t add up.]
The credit crunch. When Wall Street cratered last fall, banks essentially stopped lending to businesses and consumers alike. They’ve eased up a bit since then, as the financial sector has slowly started to stabilize. But lending is still down sharply, partly because consumers are reluctant to spend and they’ve stopped asking for loans. Obama’s mission is to make the banks more comfortable taking reasonable risks, to help boost consumer spending and keep capital flowing to businesses
Obama’s plan: The $200 billion Capital Purchase Program—an offshoot of TARP—injects money directly into banks, so they’ll have more reserves against which they can lend. The Federal Reserve’s term-asset-backed lending facility—lovingly referred to as TALF—is a $200 billion effort to restart the secondary market for many kinds of loans, ultimately making more funding available to consumers.
Effectiveness: Moderate. These programs are less visible than the AIG or auto-company bailouts, but they seem to be helping. Borrowers with good credit, for example, now have an easier time getting loans.
How to tell when it’s getting better: A key sign of success will be the availability of loans, at reasonable rates, to people with fair or even subprime credit ratings. Many such borrowers still can’t get mortgages or car loans at any interest rate, which impedes normal economic activity. Many small businesses are shut out too, and desperate for capital in order to survive.
[See why more companies are likely to fail this year.]
The stimulus plan. To counteract the cutback in consumer spending and jump-start the economy, Congress passed the $787 billion American Recovery and Reinvestment Act in February.
Obama’s plan: The biggest chunk of the money—about $288 billion – goes to tax cuts. Another $280 billion will go to states and municipalities to spend on infrastructure projects, Medicaid programs, and expanded unemployment benefits. Lesser amounts will go toward health care reform, green energy initiatives, and other projects.
Effectiveness: Too early to tell. The tax cuts might sound big, but they only amount to an extra $67 per month for the biggest beneficiaries. That’s a lot less than the average household income has fallen during the recession, and probably not enough to boost spending by much. The rest of the spending will take months or even years to filter into the economy. A recent Government Accounting Office report found that most states are off to a slow start in terms of applying for funds, with only about $50 billion due to be delegated by Sept. 30. The bulk of the funds won’t get spent until 2010, at the earliest.
How to tell if it’s working: When the economy stops shrinking and starts growing. GDP has fallen for three quarters in a row, and the International Monetary Fund predicts that overall the U.S. economy will shrink by 2.8 percent in 2009, and stagnate in 2010. Anything better than that probably represents success for Obama’s stimulus plan.
[See how bailouts can butcher capitalism.]
The auto bailout. General Motors and Chrysler had already received a combined $13.4 billion in federal aid when Obama took office. It was clear they’d be back for more, and sure enough, they asked for up to $25 billion more in February. Some economists have estimated that a total auto bailout could add up to $100 billion before it’s over.
Obama’s plan: On March 30, Obama and his automotive task force told both companies what they must do. Chrysler wouldn’t get any more aid unless it inked a rapid-fire merger, presumably with Italian automaker Fiat, by the end of April. GM has until the end of May to wrest major concessions from unions and creditors and present a convincing restructuring plan—or else face bankruptcy.
Effectiveness: Good. Obama’s auto-bailout plan is looking like one of his most decisive acts of governance so far. In contrast to the open-ended and often stealthy assistance given to banks, Obama has presented clear public guidelines to both GM and Chrysler—along with deadlines. In some respects the auto bailout is a good template for the way other bailouts ought to be handled.
How to tell if it’s working: With car sales down 40 percent, the domestic automakers are going to shrink, shed jobs, and lose customers no matter what. The ultimate test of whether the Obama’s tough love works is if the remaining companies—whether two or three—return to profitability by 2010 or 2011. With dealer inventories stuffed, meanwhile, consumers will continue to find good deals on most cars.
[See why other bailouts should follow the GM model.]
AIG. This mega-failure is a category unto itself, soaking up about $180 billion in government funding and other commitments so far.
Obama’s plan: Obama inherited this tar-baby, and there’s little to do but continue to support the dismantling of AIG, to unwind billions in risky derivative contracts that still threaten the global economy. If taxpayers are lucky, they may get their money back someday.
Effectiveness: Mixed. Obama and Geithner bungled AIG’s bonus controversy, unleashing a firestorm of outrage. But AIG is making slow progress selling assets and extracting itself from risky dealings with hundreds of companies.
How to tell if it’s working: Key developments will be the sale of AIG’s insurance divisions, auto-leasing business, and other valuable assets. If AIG hasn’t asked for any more government assistance by this time next year, consider that good news.
Unemployment. As the financial crisis bled into the “real economy,” it became inevitable that companies would start laying off workers and that unemployment would spike. And sure enough, over the last year, the unemployment rate has risen from 5 percent to 8.5 percent, with about 5 million jobs lost so far in the recession.
Obama’s plan: There’s no “jobs program” per se, but all of Obama’s recovery programs are aimed at improving the economy in general, so companies can stop firing and start hiring.
Effectiveness: Minimal so far. Even with the stimulus plan, which will help keep thousands of workers on the job, unemployment is like to rise well into 2010, probably peaking close to 10 percent. And it’s only expected to improve slowly after that, since companies that have slimmed down are often reluctant to hire aggressively until their profits improve.
How to tell if it’s getting better: The unemployment rate has been going up by about 0.4 percentage points per month. When that rate of increase starts to slow for a couple of months in a row, it will be an early sign that layoffs may be abating. Once the rate stabilizes, that may give workers a bit more confidence that the worst is past and their jobs are safer. That may be as good as the news gets, for awhile.
[See the other reason consumers have stopped spending.]
The federal deficit. It’s big. Really big. All of the bailouts and stimulus spending will add up to a federal deficit of about $1.7 trillion this year—more than three times the size of last year’s $459 billion deficit. By 2010, it should drift down to a mere $1.1 trillion, according to the Congressional Budget Office, but that’s still a staggering number. The picture gets a little better in the “out years,” but not much. Huge ongoing deficits could crowd out private investment and leave America in debt to much of the world, for decades.
Obama’s plan: So far, there isn’t much of one. In his February budget address to Congress, Obama pledged to cut $2 trillion in federal spending over 10 years. But so far he’s offered no specifics. Obama also recently told his Cabinet secretaries to find $100 million in spending they could cut this year. That’s right: "m" as in million, which is such a small portion of the federal budget that it barely registers as a distant decimal point.
How to tell when it’s getting better: When there are brutal, nasty spending battles in Washington. Cutting the deficit by a meaningful amount will require enormous cuts in popular programs, with lots of losers—and maybe some big tax hikes as well. It wouldn’t’ be surprising if Obama put this one off until his next 100 days—assuming he gets reelected in 2012.