Obama's Financial Team

[sharon sanders]

A very solid endorsement -

Even Dr. Doom Likes Them



Renowned economic pessimist Nouriel Roubini approves of Obama's picks, but they face grave challenges ahead.


Daniel Stone
Newsweek Web Exclusive
Nov 24, 2008 | Updated: 7:49 p.m. ET Nov 24, 2008


President-elect Barack Obama's administration's reaction to the current economy would have to be, in his words, "swift and bold." At a press conference Monday in Chicago, he unveiled his economic team, which will be led by Tim Geithner as secretary of the Treasury and Larry Summers as director of the National Economic Council. The two come with unique experience: The former is the president of the New York Federal Reserve, and the latter was secretary of the Treasury in the Clinton administration, before sitting in the president's office at Harvard.


Markets rallied upon word of the appointments, which also included two other senior advisers, Christina Romer (to be chair of the Council of Economic Advisers) and Melody Barnes (to be director of the Domestic Policy Council). But with the extreme fluctuations global markets are currently seeing?Obama and his new appointees will be looking for solutions to both the short-term rockiness and the longer-term economic problems?the president-elect continues to describe the crisis as "historic." Infamously pessimistic economist Nouriel Roubini, a professor at New York University, spoke to NEWSWEEK's Daniel Stone about what wise decisions must be made early on, his thoughts on Obama's economic team, and how they can they stop the bleeding.


Excerpts:
NEWSWEEK: What are your thoughts on the team Obama assembled?
Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.


What are the first things they need to tackle?
First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.


The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy?
We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans will pass once the new administration is in power.


Obama is largely powerless for the next two months. What's your outlook from now through January?
The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now.


Your view of the economic future is often a bit less than optimistic. What does Obama's team signal about what could be coming?
Look, he wants to get things done, so he's choosing a really terrific team. To me, it says that he's choosing people who have great experience. He's choosing people who are pragmatic and who realize the severity of the national problem we're facing. They're knowledgeable about markets, about the economy and the political process in Washington.

These are the very best people he could have chosen.





I can't look too far, but it's a very good signal of what he wants to do.

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[kent nickell]

Re: Obama's Financial Team

Greetings from RGE Monitor! (Roubini's Global EconoMonitor)



It is a short week on the U.S. economic calendar due to Thanksgiving, but quite an intense one, especially if we include the events that are not in the calendar.

The current U.S. and global economic conditions, remain at the very least quite challenging. The good news is that President-elect Barack Obama has unveiled a first rate economic team to drive the economy towards the recovery. Larry Summers, Tim Geithner and Christina Romer are certainly top rated experts and excellent choices to address this most severe financial and economic crisis. The bad news is that the recovery is not in sight yet and won?t be for some time.

The most recent set of events and the string of economic data are a clear sign that the crisis is not over, and the worst might very well be ahead of us. On the one hand, consumer confidence got a boost from falling oil prices and new leadership in the U.S. government. On the other hand, yesterday?s Conference Board report confirms that the economy is in a deep recession (the confidence index is still at the lowest level on record since 1975) and points to further consumer spending declines in the coming quarters. The release of preliminary Q3 real GDP growth in the U.S. (revised down to -0.5% from the initial -0.3%) displayed a downward revision to personal consumption from the original -3.1% down to -3.7%. Consumption is expected to be a significant drag on the economy for a while. Analysts estimate that the fall in energy prices ? a reflection of falling U.S. demand and a by-product of the fact that this severe recession is a global one ? will boost real U.S. income by roughly $200bn (1.5% of GDP) but it is also. On the back of this, U.S. home prices keep falling, equity prices may still be very far from the bottom and employment losses are mounting.

News on home prices is never good these days, but instead of getting better, it may still get worse. The U.S. housing sector is still far from stabilizing. Housing starts keep plunging, and demand keeps following supply downward. As a result inventories are not getting worked off and remain at record highs; downward pressure on home prices continues. Home prices (S&P Case-Shiller C-10) are down 23% from the peak and the pace of decline keeps accelerating every month. The fact that home prices have still a long way to go before reaching a bottom seems to be consensus at this point. Back of the envelope computations suggest that the wealth losses for households related to the fall in home prices are roughly $3 trillion so far, and are clearly bound to increase further ? to eventually reach the $6-8 trillion range. With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500bn. Things would look even worse if we factor in the losses related to the decline in stock market prices. Retailers including chain stores, luxury brands and online merchandize are taking a hit from declining consumers discretionary spending. Retail sales were already down 15% during July-October period. Moreover, stores expect holiday sales to plunge by almost 50 % this year taking the slump way into 2009.

And after the residential real estate woes, commercial real estate could well be the next shoe to drop. Last week, news that two big commercial mortgages that had been packaged into securities in the past year, were likely to default spooked the $800bn CMBS market that usually follows the fate of the residential mortgage market with a lag of 2 years.

The worsening credit crisis has caused a sudden spike in job losses and filing for jobless claims in November. While a hiring freeze across industries began in late-2007, lay-offs started escalating in Q3 as the credit crunch and demand contraction spread from the housing and financial sectors to the corporate and service sectors, export and commodity industries. Being a lagging indicator, monthly job losses are bound to hit the 300,000-350,000 range in 4Q08 and early-2009, taking the unemployment rate to 8.5-9% by late-2009/early 2010. The slow economic recovery, massive erosion of consumer wealth and demand and double-digit decline in industrial activity could cause job losses to continue for a few years into the recovery. With mounting unemployment, we can expect the contraction in consumer spending to accentuate and defaults on consumer and auto loans, credit cards and mortgages to accelerate.

While easing oil prices provided a breather to the trade deficit, the recent boom in exports is fading in the face of the strengthening dollar, trade credit crunch and more importantly, demand and manufacturing slowdown in export destinations like Japan, Europe, Asia ex-Japan and Latin America. The contribution of net exports to GDP growth of 2.9% in Q2 and 1.1% to Q3 prevented the economy from contracting severely. But net exports will slow to 0.5-1% in the coming quarters led by declining oil and non-oil import demand amid slowing consumer demand and manufacturing activity even as real export growth continues to fall through 2009. This slowing, though still positive, trade contribution poses further downside risks to GDP growth.

After taking a hit from high oil and commodity prices, the manufacturing sector is facing tight credit conditions and slowing domestic and export demand, leading firms to lower the sales forecast through 2009 and scaling down inventories. Declining orders for durable and capital goods indicate that industrial production will decline significantly in 2009. Plunging demand and corporate earnings will also cause a double-digit fall in business expenditure, at least through 2009, given that business sentiment especially for small firms are near record lows. The auto sector is also in a perfect storm amid slumping vehicle sales and tight credit conditions. But the recession might help pave the way for the much needed auto industry restructuring to improve fuel-efficiency and competitiveness of the Big Three automakers.

Fiscal policy will play a pivotal role in 2009 as the Fed Funds rate approaches zero. Significant fiscal stimulus will be needed during these 4-5 quarters to prevent significant growth contraction and deflation. Since any boost from tax cuts to households and businesses will be temporary, raising government spending via grants to deficit states and infrastructure spending would be more effective. While spending on infrastructure and green technology as endorsed by Obama can provide some stimulus during this prolonged growth slowdown, the extent of job creation would largely depend on the reallocation of the unemployed labor between sectors. Democrats are also pushing for unemployment benefits and food stamps which are well-targeted and have the largest bang-for-the-buck. While Obama has prioritized a large fiscal package as soon as he comes into office in Jan 2009, delays in Congress approval and actual implementation will make the stimulus less timely. Meanwhile a $500-700 bn stimulus along with other Treasury bailouts will push the fiscal deficit in the $900bn to $1 trillion range in the next two years, especially as the recent revenue boom in corporate income and capital gains and dividend taxes are fading significantly.

The recent readings of both the PPI and the CPI are showing the beginning of deflation. Slack in goods markets with demand falling and supply excessive, slack in labor markets with sharp fall in employment and slack in commodity markets means lower inflation and actual deflation ahead ? with a concrete risk of falling in a liquidity trap. And given the costs and dangers of price deflation and the deadly deeds of debt deflation, central banks have to recur to unorthodox monetary policy to address the liquidity trap and the severe liquidity and credit crunch. The Federal Reserve has reached further into the box of unorthodox tools by announcing direct purchases of $600bn in conforming MBS and agency bonds ($500bn and $100bn, respectively.) Simultaneously, the Federal Reserve is setting up a new $200bn Term Asset-Backed Securities Loan Facility (TALF) for investors of consumer loan-backed securities (i.e. credit cards, auto loans, home equity loans.) The U.S. Treasury will backstop the first $20bn in credit losses.

A few days ago the government was forced to provide a $306bn rescue package for Citigroup whose toxic asset overhang prevents a return to normalcy even after the government?s first $25bn capital injection under TARP. Under the rescue program, Citi will be responsible for the first $29bn in writedowns; after that the losses will be shared between the government (90%) and Citi (10%) who has recourse to a loan from the Fed for this purpose. In return, Treasury will get $7bn of preference shares with 8% dividend rate ($4bn to UST, $3bn to FDIC). In addition, Treasury will inject another $20bn in capital, buying further preference shares under the TARP program. Commentators seem to agree that action was necessary but worry that the terms are exceedingly lenient.

And going forward there is another problem: 8,000 banks that are not ?too big to fail.? Many regional banks have important capital concentrations in the next leg of this debt-deflation story, commercial real estate.

The backdrop to the renewed flurry of government interventions remains the completely frozen credit environment that is now gripping the non-financial corporate sector, both high-yield and investment grade. The spreads in the cash bond markets went on to exceed their CDS counterparts and reached new record highs on November 21 as the specter of bankruptcy looms ever larger for automakers and manufacturers around the world. Debt-ridden LBO companies are struggling to refinance or repay their debt while private equity companies face investor flight. Importantly, the record spreads are not only driven by firesales but find some justification in the deterioration of credit quality down the rating scale. Experts such as Edward Altman and also rating agencies predict a record default wave in the high-yield sector above 10%.

 

[kent nickell]

Re: Obama's Financial Team

Paul Volcker is back, and he warns of tough times ahead

Volcker has been chosen by President-elect Barack Obama as a special economic advisor. His 'no pain, no gain' fiscal strategy worked in the '80s, and there's no sign he's softened that philosophy.
By Ralph Vartabedian
December 8, 2008

A generation ago, Paul A. Volcker was a household name, the Federal Reserve chief who waged a hard-nosed but successful battle against virulent inflation that clouded the nation's economic future. He did it by engineering a horrific recession, clamping on the financial brakes and sending the economy into a tailspin in 1981.

Nobody knew whether his strategy would work. It certainly caused widespread pain. But by 1986, double-digit inflation was gone and price increases had dropped to about 2% annually, setting the stage for the next two decades of economic stability.

Now Volcker is back, tapped by Barack Obama as a special economic advisor. And if the president-elect follows his advice on the current economic crisis, there could be pain again and no doubt many protests -- but also the possibility of long-term benefits.

In speeches, interviews, public policy reports and congressional testimony, Volcker, 81, has laid out a fairly clear outline of what he thinks is wrong with the present-day financial system and the government's management of the economy.
His concerns go to the very core of how America lives and how Wall Street operates. A child of the Great Depression and a man of legendary personal thrift, Volcker thinks Americans have been living above their means for too long.

"It is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce," Volcker lectured the Economic Club of New York in April. "It all seemed so comfortable."

Bringing consumption back in line with income would not only crimp individuals and families, but also require major readjustments in the global economy, which has relied on the U.S. as consumer of last resort.

More oversight
Volcker has become a skeptic of modern Wall Street, worried that the nation's entire financial system has evolved to a point that the government no longer has effective control over all of its important components. And the financial industry has become beholden to complex financial engineering that clouds the picture.

"The market was being run by mathematicians who didn't know financial markets," he said this year after the crisis struck.

Clearly, he wants tough new regulations on securities markets, including oversight of hedge funds, in order to avoid the need for a bailout effort by the Fed ever again. It seems likely that he will advise Obama that the growth of U.S. consumption -- everything from government spending to household outlays -- should not be financed by selling ever larger amounts of debt to foreign interests.

But he warns people not to expect an easy ride. "It's going to be a tough period," Volcker said in a speech at the Urban Land Institute in late October. "But when we dealt with inflation, it laid the groundwork for 20 years of growth. I'd like to see that happen this time."

In pressing his case, economists and policy experts say, Volcker will have a level of experience, credibility and integrity that should carry great weight in the new administration.

"It is less about his ideas but more about his stature, wisdom and integrity," said Princeton University economist Alan Blinder. "There is not another person on the planet who can match that combination."

"Paul has a very quiet but forceful way of expressing his views," said Princeton University economist Peter B. Kenen, who began working with Volcker during the Kennedy administration. "He can say, 'I look back on 50 years of public service and I can count the times that Idea A worked and Idea B didn't work.' "

Volcker will not occupy a position in the Obama administration that gives him any direct authority, a big change from the days when he ran the Fed with an iron grip. While the Treasury, Federal Reserve, Securities and Exchange Commission and other agencies all have turf to protect, Volcker has no turf.

He also will have to work with some outsized egos and giant intellects on Obama's economic team: Lawrence H. Summers, chairman-designate of the National Economic Council; Timothy F. Geithner, nominated to be Treasury secretary; and Christina Romer, chosen to lead the Council of Economic Advisors.

The group is generally not of one mind. Major differences exist in how they view regulation, monetary control and fiscal policy. Summers, for example, was among the Clinton administration officials who helped relax federal regulation on Wall Street, recalled David R. Henderson, a conservative economist at the Hoover Institution. Romer has questioned how well fiscal policy works at all, a central tenant of Democratic economic thinking.

Further complicating the picture, Volcker has an entirely new and untested organization to head.

The day before Thanksgiving, Obama named him chairman of the Economic Recovery Advisory Board, an entity seemingly created to bring Volcker, his experience, knowledge and credibility into the administration. The board is supposed to provide "fresh thinking and bold new ideas from the leading minds across America," Obama said.

Half-century career

Volcker is the chairman and Austan Goolsbee, a noted University of Chicago economist and longtime Obama advisor on economics, will be staff director.

But those who know Volcker think his influence will be clearly felt, regardless of his portfolio.

His career has spanned half a century. He began working at the New York Fed in the 1950s, and five years later went to Chase Manhattan Bank, where he became a lifelong confidant of the Rockefeller family. By the early 1960s, President Kennedy brought Volcker into the Treasury Department in his first government job at the policy-making level.
He later held top appointments under Presidents Johnson, Nixon, Carter and Reagan.

In recent years, he has led investigations into how Swiss bankers handled the accounts of Holocaust victims, the United Nations' troubled food-for-oil program and the accounting scandal surrounding the collapse of Enron Corp. He also chairs the Group of Thirty, a who's who of world economists that examines complex public policy issues. It met over the weekend to discuss an upcoming report on the overhaul of financial regulations.

Volcker grew up during the Depression, raised by a father who taught him one lesson above everything else: Integrity is a person's greatest asset, said Volcker's sister, Virginia Streitfeld. She calls Volcker, who stands 6-foot-7, her "little brother."
He is known for practicing what he preaches about the nation living within its means. He travels with one business suit and lives in the same Manhattan apartment that he bought decades ago.

When he was Fed chief, he lived in a modest Maryland apartment and did his laundry on Saturdays at his daughter's house nearby, recalled Marina v.N.Whitman, a University of Michigan economist who has known Volcker for decades.
"Paul is one of the most frugal guys on Earth," Whitman said. "The advice he gives and the way he views the world are entirely consistent with his personal ethics and lifestyle."

He is outraged by executive compensation packages, seeing them as part of a larger breakdown on Wall Street.
"Paul can't imagine anybody wanting or needing that much compensation for consumption purposes," said Whitman, a member of the Group of Thirty. "It probably offends his sense of right and proper."

As for the bigger picture, Volcker feels that tremendous changes in the financial system have eclipsed government regulators, allowing excesses to go unchecked and subjecting the economy to ever greater shocks. Over time, the U.S. has moved from a system of highly regulated banks that funded the economy to a system of highly engineered financial markets that operated outside the scope of regulators.

Complex financial instruments were created that attempted to slice and dice the risks, handing them to investors who would be most willing to accept them.

But the mathematical models that were supposed to measure those risks actually hid the true risk from the marketplace, Volcker has said: For one thing, no mathematical model can accurately predict human hysteria in a financial panic. "Simply stated, the bright new financial system . . . failed the test of the marketplace," Volcker said this year.

'Old-fashioned'
"Paul has long been skeptical about financial engineering, which is another way of saying concocting schemes on Wall Street that nobody can understand," economist Blinder said. "He has some old-fashioned ideas that banks should apply some common sense to loaning money -- like making sure borrowers can repay."

The result of such problems was that the Federal Reserve, the linchpin of U.S. economic power, was forced to "take actions to the very edge of its lawful and implied powers" that violated "time-honored central bank practices," Volcker told the Economic Club of New York.

"The only reason I sleep at night," said a longtime friend and business partner of Volcker's, speaking on background, "is that Paul Volcker will have the president's ear."

Vartabedian is a Times staff writer.
ralph.vartabedian
@latimes.com

http://www.latimes.com/news/nationworld/washingtondc/la-na-volcker8-2008dec08,0,108304.story

 

[tropical]

Re: Obama's Financial Team

#3:
"But the mathematical models that were supposed to measure those risks actually hid the true risk from the marketplace, Volcker has said: For one thing, no mathematical model can accurately predict human hysteria in a financial panic. "Simply stated, the bright new financial system . . . failed the test of the marketplace," Volcker said this year."

Precisely the same would happen in an serious pandemic event.

That's why all actual math. pandemic models have great probabilities itselfs to gain less probable predicted serious outcomes.