Budget plan strands financial stability

Flickr photo by Orin Optiglot.

A strange week, with some encouraging and some not-so-encouraging moments -- on balance, more uncertainty at the end than the beginning.

Mortgage rates rose to just above 5 percent, but we have made that trip up several times after a high-four bottom and then dipped again. The Treasury market was more worrisome: The 10-year jumped to 3 percent upon confusion in the financial rescue and release of President Obama's budget.

The most important words of the week were Federal Reserve Chairman Ben Bernanke's on Tuesday: "If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009, and 2010 will be a year of recovery." Beware of Fed Chairmen bearing two ifs.

That same night, Obama delivered his electrifying speech to Congress and the nation. From Wednesday morning on, nothing went right. Not all bad, but not right.

Weeks ago the markets had priced in the nationalization of Citi and Bank of America. In an odd, offhand way, seeming surprised at the questions (for effect?), Bernanke dismissed any notion of nationalization. Today's Citi stock-accounting shuffle exposed spin and quibble: Nobody was ever more nationalized than Citi has been.

Treasury Secretary Timothy F. Geithner has disappeared, as has any public flicker of urgency. In semi-leaked disorder at mid-week: The "stress test" of the largest 19 banks will not be finished until April, and then banks will have six months to raise capital. Market jaws dropped like eggs from tall chickens. Whatever process is under way, nobody out here understands.

The stress test as described may be political, to prepare to ask Congress for new rules and money, but as bank regulation it is ridiculous. The Fed, Treasury, Comptroller and Federal Deposit Insurance Corp. have had many months to examine these banks.

Six months to raise capital is equally absurd -- there is no capital available, not until toxic assets are removed or identified and firewalled, and that plan is either secret or unformed.

As for restoring some measure of financial stability, in the sense of adequate credit, conditions are still deteriorating. Mortgage credit is far worse, Fannie and Freddie acting as the Dr. Kevorkians of housing. Their strategy, undisturbed by the administration: The best way to avoid credit losses is to make as few loans as possible, surcharging and firewalling applicants until they go away, with new stimulus authority unused.

Obama's budget? I have been a believer in him and his economic team. I know it is early, and I admire his refusal to let an awful recession limit his vision. However, government by spasm is a bad idea. We are still in recovery from impulsive government, and the nation needs steadiness: sound planning over broad sweep.

Rolling back the former administration's tax cuts someday, during economic recovery? Sure, in trade for 1990s controls on spending. Ramp taxes and still run a $550 billion deficit in 2013? Uh-uh. No. Further, this division of the nation into rich and not at $250,000 is a mistake.

There is a huge difference between life in these households and those earning a half-million or more, but there aren't enough of those to tax to fund a health care experiment that should begin with cost reduction, efficiency and consumer restraint.

Obama's "two-fifties" are not the same as Clinton's. Today's two-fifties have just lost half of their retirement savings, lost half of their investments, lost home equity, can't sell their higher-end homes anyway, cannot borrow against them, and have the same job-loss risk as everyone else. Tell them now that their taxes are going up?

This budget is a failure to address the fundamental challenge: restoring some measure of financial stability. In the long run that begins and ends with the government's own finances, spending within our means. A temporary Keynesian bubble is defensible, and occasional future deficits, but the upward rate pressure and crowding from open-ended federal deficits can easily abort any effort to restore private credit.

Yes, President Obama, as you said last year, we can do better. So can you.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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