Obama pushes bankers to increase lending to boost economy

Economists who believe the government should actively manage the economy to buffer the depth and length of economic downturns say that expansionary monetary policy is appropriate for combating a recession. This is accomplished when commercial banks increase the amount of money created when they increase their lending. More loans encourage increased spending which is turn increases the aggregate demand for newly produced goods and services and boosts employment as businesses increase output.

U.S. President Barack Obama chastised commercial banks for failing to lend sufficient funds to the public despite efforts by the Federal Reserve to lower interest rates and encourage more loans.

In the December 14, 2009 McClatchy article "Obama pushes bankers to increase lending to boost economy," Steven Thomma explains why President Obama wants bankers to increase loans.

WASHINGTON — President Barack Obama gave the nation's top bankers an earful Monday, telling them in no uncertain terms that it's time for them to start lending again to help boost the economy after being bailed out themselves by the nation's taxpayers.

Although aides called the meeting "positive and constructive," there was little doubt that Obama summoned the bankers to the White House for a high-profile dressing down, pitting the power of the presidential bully pulpit against them.

Beyond pressing them to pump more cash into the economy through new loans, he also told them he'll fight them and their lobbyists if they try to block tough new regulation of their industry, and that they need to do more to rein in exorbitant pay.

"My main message in today's meeting was very simple: that America's banks received extraordinary assistance from American taxpayers to rebuild their industry and now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy," the president said after the meeting.

He acknowledged that some of the drop in lending is due to banks and regulators not wanting to repeat the kinds of high-risk loans that helped cause the financial collapse. He also noted that regulators are requiring banks to increase the amount of cash they keep in reserve.

"No one wants banks making the kinds of risky loans that got us into this situation in the first place," he said.

Nonetheless, he pressed them to "explore every responsible way" to boost lending, which has dropped for five consecutive quarters.

When bankers told Obama they were taking a second look at some potential loans to small businesses, he urged them to go farther. "Go back and take a third and fourth look," he said.

Richard Davis , the chairman and CEO of US Bancorp , said outside the White House that bankers weren't hoarding cash just to boost earnings.

The problem, he said, is that many Americans and businesses are less creditworthy than they were before the recession.

"You don't want us to make loans that aren't strong and well suited" to the borrower, he said.

Republicans called it hypocritical for Obama to press bankers to make more loans.

"It's not every day the leader of the free world blames you for a problem and then tells you to do the exact same thing that caused the problem," said Rep. Tom Price , R- Ga. , the chairman of the Republican Study Committee.

Obama also lobbied for his proposed sweeping overhaul of the nation's financial regulations, challenging the bankers to justify their public support for change in light of their intensive lobbying in Congress to defeat his proposals.

"The industry has lobbied vigorously against some of them, some of these reforms on Capitol Hill ," the president said.

"I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people. If they wish to fight common-sense consumer protections, that's a fight I'm more than willing to have."

Obama also noted that many banks have shifted from paying bonuses in cash to paying them in stock that's available only after several years. "But," he said, "they certainly could be doing more on this front as well."

The group included:
— Ken Chenault , the president and CEO of American Express .
— Davis of US Bancorp .
— Jamie Dimon , the chairman and CEO of JPMorgan Chase .
— Richard Fairbank , the chairman and CEO of Capital One.
— Bob Kelly , the chairman and CEO of Bank of New York Mellon .
— Ken Lewis , the president and CEO of Bank of America .
— Ron Logue , the chairman and CEO of State Street Bank .
— Gregory Palm , the executive vice president and chief counsel of Goldman Sachs .
— Jim Rohr , the chairman and CEO of PNC.
— John Stumpf , the president and CEO of Wells Fargo .

Some CEOs participated via conference call, unable to attend because of bad weather. They included Lloyd Blankfein , the chairman and CEO of Goldman Sachs , John Mack , the chairman and CEO of Morgan Stanley , and Dick Parsons , the chairman of Citigroup .

Consumer Spending Likely To Rise In Q3, But Outlook Cloudy

In the September 17, 2009 article "Consumer Spending Likely To Rise In Q3, But Outlook Cloudy," Scott Stoddard reports that government macroeconomic stimulus policies have increased consumer spending and aggregate demand:

Gains in retail sales, home purchases and household wealth are bolstering views that consumer spending has stabilized after weighing on the economy for a year. But analysts warn that outlays could remain tepid for two years, making for a sluggish recovery.

Consumer spending, which accounts for about 70% of GDP, is set to rebound sharply in Q3 thanks mainly to government tax breaks and incentives, such as the Cash for Clunkers program that fueled auto sales. Experts say the economy could grow 3% or more in July-September after shrinking for four straight quarters.

But as federal stimulus spending wanes, the economy may struggle to maintain momentum as Americans are pressured by debt, tight credit and a weak labor market.

"The big concern for me is 2011," said Scott Brown, chief economist at Raymond James. "Hopefully, the private sector will be back on its feet and moving forward to offset the decreasing fiscal stimulus."

In a positive sign, household wealth rose by $2 trillion in Q2 to $53.1 trillion as stock values rebounded, the Federal Reserve said Thursday. It was the first gain since Q3 2007, when wealth peaked at $65.3 trillion.

"We're beginning to turn the tide," Richard DeKaser, chief economist at Woodley Park Research, said before the report. "But we have some ways to go before we completely recoup the losses of the last few years."

Housing starts and building permits also rose in August on strong demand for multifamily units, the Commerce Department said.

Adding to signs that the recession has ended, the Philadelphia Fed's index of business sentiment jumped 9.9 points in September to 14.1, a two-year high.

Economists caution, however, that the U.S. could experience a double-dip recession if unemployment and tight credit force consumers to curb spending.

Households trimmed debt at a 1.7% annual rate in Q2 while consumer credit plunged at a 6.5% rate, the Fed said, as Americans focused on paring debt and rebuilding savings.

The number of workers filing new claims for unemployment benefits dropped by 12,000 last week to 545,000, the lowest since early July, the Labor Department said Thursday.

But the number of people still on jobless rolls after an initial week of aid rose by 129,000 in the week ended Sept. 5 to 6.23 million, indicating that employers remain reluctant to hire. The jobless rate, already at a 26-year high of 9.7%, is expected to top 10%.

"We need to see income growth go back up and people need to feel more certain about their job prospects" before they feel confident enough to boost spending, said Mark Vitner, an economist at Wells Fargo Investments.

Big-ticket goods such as autos will probably bear the brunt of consumer cutbacks, analysts said.

A Bloomberg News survey on Thursday showed that almost a third of U.S. households plan to trim spending while 58% expect no change amid concern about the economy over the next six months. Just 8% of households plan to increase spending, the survey showed.

Vitner said that a double-dip recession was unlikely but that economic growth would likely taper off next year after the expiration of stimulus measures such as the $8,000 first-time homebuyer tax credit and Federal Reserve efforts to keep mortgage rates low.

"We're likely to see a relatively sluggish recovery," he said.

G-20 to maintain economic stimulus measures

In the September 5, 2009 article "G-20 to maintain economic stimulus measures," Associated Press business writers Jane Wardell and Aoife White report:

LONDON – Top finance officials from rich and developing countries agreed Saturday to curb hefty bankers' bonuses, but the proposed crackdown on excessive payouts so far falls short of European demands after the U.S. and Britain shied away from imposing a cap.

The Group of 20 finance ministers also pledged to maintain stimulus measures such as extra government spending and low interest rates to boost the global economy, warning that the fledgling recovery that provided the backdrop to their meeting here is by no means assured.

"The financial system is showing signs of repair," said U.S. Treasury Secretary Timothy Geithner. "Growth is now under way. However, we still face significant challenges ahead."

The G-20 joint statement issued at the end of their London meeting said that fiscal and monetary policy will stay "expansionary" for as long as needed to reduce the chances of a double-dip recession.

The International Monetary Fund has said that the global economy is beginning a sluggish recovery from its worst recession since World War II, raising its estimate for global economic growth in 2010 to 2.5 percent, from an April projection of 1.9 percent.

But the IMF also downgraded its forecast for this year, saying it would shrink by 1.4 percent, instead of 1.3 percent.

The group also pushed ahead with plans to reform the financial system, including tougher action against tax havens and giving developing countries a greater say in global governance.

French Finance Minister Christine Lagarde said this ensured that "things will not go back to business as usual ... that there are no dark areas anymore to hide."

But while the gathering — a preparatory session for the G-20 leaders' summit in Pittsburgh later this month — reached agreement on the need for ongoing growth-boosting measures and some regulatory reform, it compromised on the hot topic of bankers' bonuses.

Curtailing bankers' pay and bonuses has been seen as key by some countries after the risk-promoting payment culture was blamed for fueling the current financial crisis.

British Treasury chief and meeting host Alistair Darling said that there must be no more cases in which "people are being rewarded for reckless behavior."

Heading into the talks in the British capital, European countries had pushed for the G-20, which represents 80 percent of the world's economic output, to enforce an official cap on both individual payouts and collective bonus pots at financial institutions.

Britain supported the general effort to reign in bonuses, but not the cap, while the United States was more intent on pushing its proposal for a global accord to force banks to hold more capital reserves.

In the event, the G-20 agreed to give the Financial Stability Board, an international body established at the London Summit of G-20 leaders in April, the task of drawing up practical proposals that the Sept. 24-25 leaders meeting in Pittsburgh could agree on.

Suggested measures that countries could take included proposed clawback mechanisms to ensure that bonuses are linked to the long-term success of deals and could be forfeited if they fail to deliver over a period of years.

Lagarde insisted that this would mean real change by limiting bonuses, playing down differences, while Darling again stressed that a straight cap was impractical.

"If you try to cap individual bonuses it would be easy for people to invent exotic products — which we've seen — to get their way around a rather crude mechanism like that," he said.

The G-20 communique failed to directly address a proposal from Geithner for a new international accord to increase bank's capital reserves, but he said he was encouraged by "support around the room."

"Capital is critical" as a shock absorber to cover potential loan losses, Geithner said.

Going into the meeting, Geithner wanted to reach agreement on an accord by the end of 2010, with implementation by the end of 2012.

The communique did not directly address that plan, but called for rapid progress in developing stronger regulation, including a requirement that banks hold more and better capital once recovery is assured.

Geithner also stressed the need for discussions on a so-called exit strategy to withdraw government support for the economy and pay off trillions of dollars in debt, saying a recovery strategy would not be effective "unless we can make fully credible our commitment to reverse those actions as soon as conditions permit."

German Finance Minister Peer Steinbrueck, who has been openly critical of the government debt being loaded up by big spending policies, went further, saying that it was essential to start drawing up exit plans now.

"It makes sense to think ... how can we avoid the next crisis which might be caused by a policy of very cheap money, a huge amount of liquidity and an overstretching of our state aid budgets," he said.

British Prime Minister Gordon Brown won support for his push to take tougher action against tax havens, with the G-20 agreeing to a March 2010 deadline to start sanctions against tax havens which refuse to comply with new transparency rules agreed at the April G-20 leaders' summit in London.

The G-20 also reaffirmed its commitment to changes at the World Bank and the International Monetary Fund to give developing countries a greater say on those bodies.

Brazil, Russia, India and China — the so-called BRIC countries — proposed a quota shift of 7 percent in the IMF and 6 percent in the World Bank Group to reach what they view as a more equitable distribution of voting power between advanced and developing countries.

The G-20 stopped short of that, but said it will complete World Bank reforms by spring 2010 and the next IMF quota review by January 2011.

The G-20 includes 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, Britain and the United States. The European Union, represented by its rotating presidency and the European Central Bank, is the 20th member.

Why the Stimulus Is Helping the Economy, But Not Obama

In the September 4, 2009 TIME magazine article "Why the Stimulus Is Helping the Economy, But Not Obama," Massimo Calabresi reports:

Proving a negative is always a challenge, but there's mounting evidence that the controversial $787 billion stimulus bill is achieving one of its major goals: shortening the recession. Economists at Goldman Sachs say that the bill, officially called the American Recovery and Reconstruction Act, has resulted in a 2%-3% boost to annual GDP in the second and third quarters of this year, turning what could have been a worsening recession into potential growth. For President Barack Obama, whose poll numbers have dropped precipitously from around 65% to around 50% as Americans have become worried about government spending and health-care reform, that should be good news: he fought hard against Republican opposition to push the bill through Congress as one of his first legislative acts, and the fact that it's working should be a vindication.

But it's not that easy. Recent polls show widespread disapproval of the stimulus bill: 51% of Americans polled last month by USA Today and Gallup said they thought the government should be spending less under the plan, while 44% said they thought the government was spending the right amount, or should be spending more. If anything, it seems, the stimulus plan is hurting the President even as it helps the country.

The most obvious reason for that disconnect is jobs: despite the signs of a turnaround, unemployment remains stubbornly high at 9.7%, with employers cutting 216,000 jobs in August. While jobs always trail economic rebounds, the unemployment number is higher than economists thought it would be, even in the worst case scenario forecast by the Treasury department's "stress tests" last spring. The point is not lost on Republicans, some of whom have argued lately that no more of the stimulus money should even be spent. "The metric of this bill was job creation," says Don Stewart, spokesman for the Senate's top Republican, Mitch McConnell, "and it hasn't done that."

Still, one would think that the mere infusion in six months of $88 billion into the economy — that's how much the government has spent so far — would buy Obama some good will; certainly many local and state politicians, including some who originally opposed the stimulus, have been quick to claim credit for stabilizing their economies with the federal largesse. Except, as it turns out, the very thing that makes the stimulus help the economy in the short term is a political loser: the program is giving most of its money to the poor. Of that $88 billion, the majority has gone to low-income recipients. Nearly $28 billion has flowed to Medicaid; $19 billion to unemployment payments; $10 billion to states to bolster educational programs that primarily target the poor; $4 billion to student financial assistance; and $1 billion to rental assistance, among the biggest ticket items alone. And that doesn't even include the share of the $62.5 billion in tax breaks available to the poor through the cut in withholding taxes; the Making Work Pay program, which gives tax breaks to wage earners; and the extension of COBRA Health insurance benefits.

All of that money works well to stimulate the economy because the poor don't save — they spend, and fast. "Recovery money aimed at low and moderate income households has a dual benefit," says Chad Stone, chief economist at the left-leaning Center on Budget and Policy Priorities. "Besides relieving hardship, it gets spent quickly, stimulating economic activity that would not otherwise take place."

But giving money to the poor never won anyone many crucial swing votes. The poor are already disproportionately likely to vote for the Democrats and Obama, if they vote at all. And at a time when the President is under attack from the right wing for being a free spending leftist, shoveling tens of billions into redistributive programs doesn't help his image with wavering independents who are nervous about the growth of government deficits.

The Administration is doing its best to push back. Joe Biden, Obama's point person on the stimulus bill, delivered a lengthy defense of it Thursday at the Brookings Institution. Thanks to the recovery act, he said, "Instead of talking about the beginning of a depression, we're talking about the end of a recession, eight months after taking office." Unfortunately for him and Obama, the money that is boosting the economy isn't boosting their poll numbers.

Will Overstimulating Economy Bring Inflation?

The National Public Radio (NPR) story "Will Overstimulating Economy Bring Inflation?" considers the relationship between overall spending and inflation:

Morning Edition, June 26, 2009 · While the United States worries about a repeat of the Great Depression, Germans have another crisis in mind: the hyperinflation that hit them more than 80 years ago. And inflation may be on German Chancellor Angela Merkel's mind when she meets with President Obama in Washington on Friday.

Just after World War I, Germany underwent what is now the textbook case of hyperinflation. Germany had debts to pay and it had gotten into the bad habit of basically printing money. At the peak of the crisis, German currency included a 50-million-mark note.

In When Money Dies: The Nightmare of the Weimar Collapse, Adam Fergusson wrote:

"In October 1923 it was noted by the British Embassy in Berlin that the number of marks to the pound equaled the number of yards from the Earth to the sun.

"Dr. Schacht, Germany's National Currency Commissioner, explained that at the end of the Great War one could in theory have bought 500,000,000,000 eggs for the same price as that for which, five years later, only a single egg could be procured."
Some people worry the United States might be heading for inflation soon. The amount of money in an economy is determined by its central bank, which is supposed to be independent of politics.

In the current crisis, the Federal Reserve and other central banks around the world have been taking unprecedented, historic steps to make credit available — to basically push money into the economy.

The head of Germany's central bank has warned that this could lead to inflation.

Merkel earlier this month said, "We must return to an independent central bank policy, and to a policy of reason. Otherwise, in 10 years' time, we'll be in exactly the same situation."

Merkel worried the central banks might be bowing to political pressure, losing their independence.

Josef Joffe, editor of the German newspaper Die Zeit, says concern about inflation is in the German DNA. He worries there's just too much money in the economy.

"[U.S. Treasury Secretary] Tim Geithner and [Fed Chairman Ben] Bernanke and the president and [National Economic Council Director] Larry Summers think they can soak it up again when the time comes," Joffe says. "But meanwhile, they are pumping unprecedented liquidity into the American global system. And I just can only say, 'Good luck, Mr. President, in soaking up that excess liquidity.' And I think that's what Mrs. Merkel reacted to. If the Germans believe in one god, it's the independence of the central bank."

So are we at risk of catching a nasty case of inflation down the road? I took our U.S. economy in for a kind of doctor's office visit to a place that gives this advice out to countries all the time — the International Monetary Fund.

"What we have been telling ... not this country, but all our members, is that there is a need in the short run for macroeconomic policies to support economic activity. But there is a need for every central bank, for every government to have a strategy, to start thinking now about how to exit when the moment comes," says Carlo Cottarelli, the IMF's director of fiscal affairs.

There could be difficulties, he says.

Raising interest rates and pulling money back out of the economy is often unpopular. It's been said the role of a central bank is to "pull away the punch bowl, just as the party gets going." That time is arguably still in the future. As we all know, it's still a pretty lousy party.