President Obama and his chief economic advisors Lawrence Summers and Timothy Geithner have had many weeks to plan out part two of the TARP program and the broad outlines of the stimulus package. The market clearly has rejected the Pelosi version of the stimulus as a giant giveaway to special interests that does little to reinvigorate the housing industry or bolster consumer confidence. It needs to be overhauled in the Senate, and the president should move quickly to assure investors that a trillion dollars won’t be wasted.
In Washington, policy makers were watching share declines and considering moves that would go beyond last fall’s effort to infuse cash into banks in exchange for preferred shares. While the government money helped to stabilize the financial system for a while, the moves haven’t persuaded investors that banks have strong enough financial cushions to absorb further losses. Policy makers are now looking for alternatives to preferred-share investments to help banks build up their equity to give them confidence to begin lending again.
Among other plans under consideration, government officials are weighing the option of buying securities that pay interest like bonds but can be converted into common stock. Such “convertible” securities, typically issued by companies struggling to raise capital, often leave the buyer owning a big chunk of the company. When the securities are converted to common shares, other common stockholders’ shares are diluted, cutting the value of the banks’ shares. Current share prices appear to reflect that low value.
Team Obama has massive resources at their fingertips, and can have whatever they want from a Democratic Congress for at least a few months. Serious economists know that the best stimulus package will include incentives to buy homes and cars as well as serious tax relief, but will the reality of the urgency move President Obama to a early test of his power vis-a-vis his doctrinairre allies in the House and Senate? If he misses the chance to craft a serious stimulus and to restore confidence, he’ll own the mess that follows. Rarely does a president have such an opportunity. Will he use it, or will the caution that has marked his campaign carry over into a predictable 100 days of touching all the liberal sweet spots?
Because the current crisis is one of confidence, President Obama can restore confidence by demonstrating that he will listen to the economists and not the political handlers throughout 2009. He has more than a trillion dollars to work with, but that trillion can easily be wasted.
ReadtheStimulus.org is a handy reference guide to the first draft of the stimulus plan, a draft that the president needs to toss asap.