Obama & Frank: double dips and Washington exit strategies

Source: Reuters Blog

The official version of reality in use this week at the White House says that the U.S. economy is recovering, slowly but surely, and unemployment is falling. The same perspective says that residential real estate markets are stabilizing and banks are starting to lend more aggressively. None of these statements are true, but there are quite a few people in the White House who believe them nonetheless.

My view is a bit different, namely that unemployment is likely to remain at current levels during the balance of 2010. The sharp reduction in credit available to the real economy and the overhang in the mortgage markets are not likely to improve anytime soon. I spoke about the economic outlook with Larry Kudlow and James Glassman on CNBC last Friday: “Double Dip Fears Mount.”

While the public sector of the U.S. economy received a great deal of assistance due to various forms of stimulus, the private sector never recovered from the first “dip” during 2008 and much of 2009. Virtually all of the Fed’s assistance from zero interest rate policy has gone to the banks or the U.S. Treasury, with no help for American households and workers. This means higher unemployment and lower economic activity in coming months or even years.

“When the FOMC tries to boost the economy and credit creation, none of the benefit is working its way to investors or consumers,” we wrote last week in The Institutional Risk Analyst (“Zombie Love: Do Fannie and Freddie Provide Any Benefit to the U.S. Economy?”). “Because the Fed and the White House are allowing the banking sector to heal its collective wounds via zero interest rate policy from the Fed, the banking system is not passing along any of the benefit of Fed easy money. Thus while the banks absorb all of the subsidies from the Fed and Treasury, U.S. households, businesses and private investors are slowly destroyed.”

“Policy makers in Washington know all of this, of course,” we continued. “Nobody in the Obama White House or the Fed dares to admit in public that the ‘quantitative easing’ by the FOMC is pretty much useless in terms of helping the real, private economy.”

No surprise, then, that Wall Street economists are gradually pushing down their “growth” estimates for the U.S. economy for the balance of 2010 and beyond. This grudging admission of the truth is mirrored in shrinking analyst estimates for revenue for sectors from banking to retailing to autos. With growth receding, there is no surprise in reports that investors are fleeing equities, as the New York Times reported on Sunday.

The financial crisis of 2008 and the aftermath raise fundamental questions about money, debt and value in a way that Americans have not seen in over a century. The response to the crisis by the Fed, focused entirely on Wall Street, begs the question of whether Main Street can survive. The falling expectations for the economy are translating into truly horrible poll numbers for Democrats and the Obama Administration, but also for all incumbents. The rate of turnover in the Congress this year could be one of the highest in the post-WWII era.

If the Democrats in Congress take a trouncing as is widely expected, then President Obama may decide not to run for another term. While that possibility may seem far-fetched, my sources in Washington say that President Obama may seek to become the first American Secretary General of the United Nations.

According to this admittedly speculative scenario, President Obama will choose not to run again so he can take a shot at the UN post. Obama knows that he never could win the position after two terms.

The other interesting twist that some see emerging after the November election due to the poor economic outlook involves the newly created Consumer Financial Protection Bureau, or CFPB. The chair of the Congressional Oversight Panel, Harvard Law Professor and bankruptcy expert Elizabeth Warren, is one of the leading candidates for the job, but the banking industry naturally is opposed.

It is becoming clear that the Obama Administration may not pick a candidate for the CFPB job until after the November election in order to dodge this very political issue. By holding the voting on the new agency head until after the election, members of both parties will be able to extract maximum contributions from the banking lobby. But I hear that the choice may have already been made.

It may surprise some observers that House Financial Services Committee Chairman Barney Frank may want the CFPB job for himself. Frank reportedly has already expressed interest to the White House. Sad to say, Chairman Frank probably has seniority over Chairman Warren.

“Barney did some heavy lifting,” says a source on the committee who is close to Frank. “He might want a different gig, especially if he loses the chairman’s seat in November. Frank would not want to hang around in Congress as part of the minority. Being the first CFPB emperor, however, could be a more interesting gig than, say, eventually being made head of HUD of the FHA.”

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URL to original article: http://www.housingwire.com/2010/11/03/obama-frank-double-dips-and-washington-exit-strategies