What Went Wrong?

Ezra Klein attempts to explain what went wrong with the stimulus:

The original stimulus package should’ve been bigger. Rep. David Obey, chairman of the House Appropriations Committee, says the Treasury Department originally asked for $1.4 trillion. Sen. Kent Conrad, chairman of the Senate Budget Committee, wanted $1.2 trillion. What we got was a shade under $800 billion, and something more like $700 billion when you took out the AMT patch that was jammed into the package. So we knew it was too small then, and the recession it was designed to fight turned out to be larger than we’d predicted. In the end, we took a soapbox racer to a go-kart track and then realized we were competing against actual cars.

Who is lying?

Here are a few citations of quotes from President Obama in early 2009:

January 8, 2009

There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy.

The emphasis is mine. This is in reference to the $775 billion stimulus plan that was on the table at time. The actual bill passed was roughly $100 billion larger. Isn’t the implication of this remark that the bill’s size was adequate? That’s what I would conclude from the next remark.

February 9, 2009

ELKHART, Indiana, Feb 9 (Reuters) – President Barack Obama said on Monday that the economic stimulus bill being considered by Congress is the right size and scope and warned that the country’s troubles will worsen if it is not passed promptly.

‘It is the right size, it is the right scope. Broadly speaking it has the right priorities to create jobs that will jump-start our economy and transform it for the 21st century,’ Obama said of the more than $800 billion bill at a rally in Elkhart, Indiana.

And this observation from the New York Times is elucidating:

January 5, 2009

But participants in the private meetings said there did not seem to be agreement on the scale of the package. Mr. Reid said many economists have urged a bill of $800 billion to $1.2 trillion, while Mr. Obama’s advisers estimated legislation at no more than $775 billion.

Do these quotes paint a picture of a White House that was fighting for a significantly larger bill but had decided to settle for only $800 billion let alone a White House that really wanted a bill twice as large? Or does it suggest a White House that had either decided on a $775 billion bill or had made a political calculation to ask for no more than $775 billion?

Is there serious evidence from the limited debate on the stimulus that the Democratic leadership was fighting for a significantly larger bill? I don’t recall such a fight.

This might be a good time to quote James Graham’s poem

He either fears his fate too much,
Or his deserts are small,
That puts it not unto the touch
To win or lose it all

You can reasonably take the position that the president’s economic or political advisors were wrong. You can reasonably take the position that either the president was lying then or the Congressmen quoted in Ezra’s piece are lying now. My own view is that they’re remembering things that didn’t actually happen.

You can take the White House’s position which has the virtue of consistency: they asked for and got what they wanted and it’s doing just what they thought it would do. It just that the economy was in much worse shape than they thought it was.

But you can’t reasonably take the position that the stimulus didn’t work because the amount that the president really wanted was shot down. Not unless you’ve got some facts that don’t seem to be in evidence right now.

13 comments… add one
  • PD Shaw Link

    The NY Times on February 9, 2009:

    “President Obama, while once again urging Congress to act swiftly, avoided taking sides by saying that a package of about $800 billion was in the ballpark of what he believed the economy needed.

    ‘The scale and scope of this plan is right,’ Mr. Obama said in a speech to House Democrats who were on a retreat in Williamsburg, Va. “

  • Icepick Link

    You can take the White House’s position which has the virtue of consistency: they asked for and got what they wanted and it’s doing just what they thought it would do. It just that the economy was in much worse shape than they thought it was.

    Did they really not know how bad it was? That’s hard to believe.

    The housing market had been collapsing since 2007.

    The world-wide financial markets had come very close to completely freezing up a few months before, and had required an emergency $700 billion bailout from the US government to keep functioning.

    The stock markets were collapsing at that point.

    Employment was collapsing at that point. (They love to point out how many people were making new UEC claims at that time vs. now. That’s done, of course, because otherwise the current numbers are a complete effing disaster.)

    And if it hadn’t been clear before, by then it was clear that economic boom of the mid-2000s had been based solely on a US residential real estate market that had been insanely over-valued.

    Given all of that, which was all public knowledge at that time, it is impossible to believe their claim that they didn’t know how bad things were. No one can possibly be that stupid.

  • Andy Link
  • steve Link

    A leader has to decide what is politically feasible. None of us was there, so we dont know, but it is certainly possible that Obama’s advisers wanted a larger stimulus, but they decided it was not politically possible. They had to pick an amount small enough to keep the Blue Dogs on board. It would then be the job of the WH to spin it as a victory. this is actually pretty common politics.

    “Given all of that, which was all public knowledge at that time, it is impossible to believe their claim that they didn’t know how bad things were. No one can possibly be that stupid.’

    No one knew what toxic assets the banks really had at that time. No one knew what was going on in the shadow banking system. Derivatives, being unregulated, were an unknown.

    Steve

  • None of us was there, so we dont know, but it is certainly possible that Obama’s advisers wanted a larger stimulus, but they decided it was not politically possible.

    The principle of parsimony requires us to argue from what we know and can support rather than from what might have happened and what people might have said.

    Just to be clear, you’re saying that President Obama put his weight behind a plan that by his own statement was completely inadequate solely for political reasons, lied about it, and has lied about it since. I prefer to think that David Obey is lying now in preference to saying that the House leadership screwed up.

  • Icepick Link

    No one knew what toxic assets the banks really had at that time. No one knew what was going on in the shadow banking system. Derivatives, being unregulated, were an unknown.

    Which is why the system almost collapsed into itsellike a black hole in September 2008. They cannot claim (and you cannot argue) that they weren’t calling it a once in a generation catastrophe because that was how it was presented at that time. Or are you arguing that they thought it wasn’t a catastrophe but were just calling it that so they could do whatever the hell they wanted, only to find out it was as bad as advertized?

    No, they are lying now when they say they didn’t know how bad it was, because it was plain as day how bad it was to anyone following the story. And they can’t dare admit that they didn’t know what the hell they were doing when they pissed away a few trillion during the winter and early spring of 2009. (Thank you FRB MBS purchase program! Thank you TARP! Thank you TALP! Thank you all the other programs and measures that I am too tired to name!) Again, they’re either liars or they are willfully stupid, which makes them evil. It’s probably all of the above. Why you wish to defend the indefensible is beyond me.

  • Icepick Link

    Actually, let me take another look at this.

    No one knew what toxic assets the banks really had at that time. No one knew what was going on in the shadow banking system. Derivatives, being unregulated, were an unknown.

    Who didn’t know what? Several individual investors and hedge funds made killings betting against the markets.* How is it they knew this when no one else did?

    How is it that Goldman Sachs knew enough to play all sides against each other AND managed to get paid off 100 cents on the dollar for all its bad bets with AIG? (And remember that it was Obama’s Chosen One who argued for that, along with Goldman’s Man at the Treasury during the end of the Bush Presdiency. True bi-partisanship!)

    How is it that highly placed officials at Treasury and the FRBs knew exactly how to structure payouts through AIG so that institutions like Deutshe Bank and GS could make billions off the government while, respectively, pretending to either not get any US money or while allegedly “paying back” the tax payers?

    It seems like an awful lot of sophisticated payouts were made to all the “right people” before anyone knew what was happening.

    Or maybe they all got lucky. We all know God favors the exceedingly rich. But then the question becomes, Why didn’t the regulators know what was happening? How is it that the US Treasury and the FRBs didn’t know there was a tremendous housing bubble? I knew that was happening in 2005 just by looking for a house. What I didn’t know (because I didn’t care, not having the bankroll to play the game) was the tremendous bets being placed in the derivatives markets. However, the USTD and the FRBs had to know what was going on in terms of volume. Given that huge bets were being placed on an hyper-inflated market** a disaster was easily predictable. In fact, reading the archives of sites such as Calculated Risk you will see that people were making those predictions at the time – and were doing so based on analysis of actual data, not the reception of their tin-foil hats.

    What’s more, all the problems you mention were already commonly discussed problems by early summer of 2007, if not earlier. And with the collapse of Bear Sterns in spring of 2008 the problem became more pronounced. How is it that the relevant authorities had not investigated these matters by fall of 2008? How can the claim complete ignorance by January of 2009? Remember that Obama choose TIMMAY! as his SecTreas because of the mastery of the topic he developed as President of the FRB of New York.

    It simply is not credable to say that they didn’t know what was going on with toxic assets, shadow banking and the derivatives market by January 2009, because some of the most important players in the crisis had been dealing with just those issues for almost two years by then and were on Obama’s team. It defies all reason to claim “they didn’t know”. Even Tim Geithner couldn’t have been that incompetent!

    * One of them, Jeff Greene, a real estate investor from So. California, is now using his new found mega-riches to buy a Senate seat from Florida. A “Florida” senator form SoCal will go nicely with all our “Florida” congressmen from New York.

    ** Yes, hyper-inflated. One house I looked at in June of 2005 had seen its value go up on a 28% annual rate, compounding, for at least five years. And that house only had 1800 sq ft and was not near a beach, lake or anything else particularly desirable. The entire state of Florida was experiencing similar inflation.

  • PD Shaw Link

    My opinion looking back at the news of the day was that the administration did not care so much about the amount of the stimulus, or the quality of the stimulus, but they were concerned about the timing of the stimulus. They wanted it ASAP and almost any dispute that was not formed in some sort of concensus was cast aside for the greater good.

  • PD Shaw Link

    That’s not arguing that the administration did not know how bad it was, just that they focussed on one leg of the engineer’s triangle.

  • steve Link

    “Just to be clear, you’re saying that President Obama put his weight behind a plan that by his own statement was completely inadequate solely for political reasons, lied about it, and has lied about it since.”

    He wanted a Porsche, but the best he could get was a used Corolla. Better than nothing, which would have been the option. As cheerleader -in-chief, his job is then to try to convince people it could work. Did you ever really talk to someone who lived through the Great Depression? Remember Reagan’s sunny optimism?

    Icepick- I knew that there was a housing bubble. Who didnt? What I did not know, was the extent to which the banks were holding MBS and the huge derivatives market amplifying everything. Yes, a lot of people made money knowing that this was going on. No one knew how bad the total picture really was. No one had access to all of that information. Remember that this is an international crisis. No one knew how bad UBS was or the other European banks.

    “What I didn’t know (because I didn’t care, not having the bankroll to play the game) was the tremendous bets being placed in the derivatives markets. ”

    Yes, yes, I read CR also. There were lots of signs we were in a housing bubble. People made money knowing that. However, no one really knew the extent of the problem. So what if a housing bubble pops? We lose a couple of trillion, have a mild recession, and then go on. It was the amplification effects that were not quantifiable. Some guessed at it, making broad predictions. They did so knowing their piece of the puzzle, people like Goldman, or just taking a broad view knowing that a company like AIG just had to crash and take down others considering the valuations it was using. But, since a lot of this was not transparent or quantifiable, there was no clearinghouse or market for derivative just as one example, no one could know the full extent. They knew it was awful, just not HOW BADLY it was awful.

    Steve

  • Icepick Link

    However, no one really knew the extent of the problem. So what if a housing bubble pops? We lose a couple of trillion, have a mild recession, and then go on. It was the amplification effects that were not quantifiable. Some guessed at it, making broad predictions. They did so knowing their piece of the puzzle, people like Goldman, or just taking a broad view knowing that a company like AIG just had to crash and take down others considering the valuations it was using. But, since a lot of this was not transparent or quantifiable, there was no clearinghouse or market for derivative just as one example, no one could know the full extent. They knew it was awful, just not HOW BADLY it was awful.

    That claim can be made in 2007. But by the middle of 2007 the crisis was apparent and it was being reported upon. Why didn’t the FRBs and the Treasury Dept start researching the matter at that point?

    And once Bear Sterns failed in the spring of 2008, they had no reason to NOT look into the matter. By January 2009 they had to have a fair idea of the scope of the problem, if not the particulars. Or do you really think Geithner et al were both that stupid and that incompetent? So which is it, are they lying about what they knew then, or are they the most incompetent people on the planet.

  • steve Link

    “By January 2009 they had to have a fair idea of the scope of the problem, if not the particulars.”

    They had a general idea. They had to do stress tests to make guesstimates on the value of assets held. How exactly were they supposed to value everything in the shadow banking system? Value the derivatives “market”? How were they supposed to evaluate how bad things were in the rest of the world? What authority did they have to go mucking around in UK, Swiss and German banks? This alternation I see by between government cannot do anything right and government should be omniscient puzzles me. The whole financial system screwed the pooch this time and no one new precisely how big the problem was.

    You are probably correct that if they had really started digging in 2007, they would have had a much better handle on things, rather than waiting until the end of 2008.

    Steve

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