Obama Doesn't Dare

Joseph Stieglitz and Paul Krugman reproach Obama for beating around the bush. Both Nobel Prize winners in Economics-whose minstrel verses make the rounds of every opinion column-recite nothing else but the events of the times and sing that time is eating away at Obama; time because of his tardiness.

The problem is very simple. The issue is that the financial power is bankrupt: the power whose muscles of domination grew twenty times its size in these last twenty years from freeing up the banks and the financial system while its flags waved in the wind. Yet at the end of a long cycle of construction, the banks found themselves with a large proportion of toxic assets which are nothing more than debts to be paid. But they are not payable because the value of the mortgages became greater than the value of the properties.

If the mortgage banks converted those assets into bonds to sell to other banks and financiers in order to collect new funds and repeat another batch of loans, it’s because those bonds were very attractive. In fact, the interest yields were very high, although loaned to people with low incomes. When the construction cycle dies out, the number of unsold houses increases, the prices fall and then the mortgages are worth more than the properties. Those bonds are worthless and the assets lose value like when a farmer’s crops are flooded.

Obama seems to be playing it subtle by financing (at low interest rates and with good installments) those who want to buy up those toxic assets, and in doing so liberate the banks from their imminent collapse. Moreover, don’t forget that those assets contain mortgages which protect loans for people with low incomes, but have high interest rates, which is what makes these strange financial beasts so attractive.

It’s disputable then, whether these are goods that are actually devalued lower than their true value, because in fact one reason for the drop in stock prices is due to real defects of the merchandise in question (shares, for example, of a factory going through hard times), but panic is another. Or on the contrary, it’s also disputed if this is about junk bonds, which is good while it’s viable, have a high risk of default and then make it necessary to foreclose the property and sell it for less.

However, Obama is trying to detoxify the banks and consults the best detoxifiers to come up with the best and quickest formulas. In comparison, it’s like a Colombian government trying to sell the flooded harvest, offering credit and incentives since whatever is saved of it is uncertain. It has never been done before.

Obama doesn’t dare nationalize. This means buying up the banks at their current price and then capitalizing them so that they can start functioning again. But Obama doesn’t dare with the powers that be. Belisario Betancur here in Colombia nationalized several crumbling banks during the mini-crisis of the 80s without being a socialist, and Gaviria re-privatized them without being an oil tycoon. But those were times when governments were dog catchers of banks that were conceited, disobedient or irresponsible.