On Monday-one year after the once-mighty Lehman Brothers collapsed in the nation's biggest bankruptcy-President Obama addressed the state of the economy and again outlined his proposals for what he calls reform. The location-Federal Hall at 26 Wall Street, near the New York Stock Exchange and New York Federal Reserve Bank-was fitting. George Washington took his presidential oath there, a precursor for how intertwined Washington and Wall Street would become. And Obama's speech indicates that he's still making the grave error of mistaking the health of Wall Street for the health of the American economy.
Obama chose not to deliver his speech on, say, the streets of Bend, Oregon, or Fresno, California, which provide different indicators of our economic predicament. That's because Washington's approach to the crisis has been to focus on the banking system, throw a few crumbs to citizens, and hope everything else will magically work itself out.
The problem with concentrating on the banking system is that it allows the administration to present an overly optimistic assessment of its actions. "The storms of the past two years are beginning to break," Obama pronounced, attributing this to a government that "moved quickly on all fronts, initializing a financial stability plan to rescue the system from the crisis and restart lending for all those affected by the crisis." He continued: "By taking aggressive and innovative steps in credit markets, we spurred lending not just to banks, but to folks looking to buy homes or cars, take out student loans, or finance small businesses. Our home ownership plan has helped responsible homeowners refinance to stem the tide of lost homes and lost home values."
Those steps were certainly aggressive. Under both the Bush and Obama administrations, the government, from the Federal Reserve to the Treasury Department, has flushed the banking systems and other components of the financial markets with $17.5 trillion worth of loans, guarantees, and other forms of support. About another $1 trillion has been provided to citizens through the recovery package, first-time homeowner tax benefits, auto purchase credits, and approximately $800 billion to help guarantee the loans of certain lenders-which somewhat helps borrowers, but helps lenders more.
But these measures have hardly brought the economy back from the brink. They brought Wall Street back from capital starvation and prevented the possibility of more big banks going bankrupt-instead of the slew of smaller and mid-size ones that have since met the same fate as Lehman Brothers. Taking credit for stabilizing the financial system after feeding it with massive amounts of federal money is like a teacher bragging about turning around the academic performance of a failing student after handing them all the answers to the big tests.
Here's how the economy is really faring (and how Washington is failing to take adequate steps to fix it):
- National unemployment is at 9.7 percent, higher than last year's 5.8 percent, with double digit jobless rates in 139 metropolitan areas this July, compared to 14 last July.
- The number of foreclosures is greater than last year: nearly 2 million new foreclosure filings occurred in the first half of 2009, up 15 percent from the same period in 2008.
- While homes in some areas have begun to slowly sell again, they are doing so at deeply depressed prices, in many instances below their mortgage value.
- Wall Street bonuses are back to pre-crisis levels. For some firms, such as Goldman Sachs, they are even higher.
- Bank leverage, or excessive borrowing on the back of risky assets-a major cause of the meltdown-is rising again.
- Geithner recently reported that his program to enable private financial firms to buy up toxic assets with government help will wind up costing less than the $1 trillion he had first envisioned. However, he did not mention that there are less toxic assets available to buy partly because the Fed has allowed banks to use some toxic assets as collateral in return for cheap loans.
- Big banks are bigger than they were last year. Since the Fed blessed more mergers last fall, the nation's three largest banks-Bank of America, JPMorgan Chase and Wells Fargo-hold the maximum percentage of legally permissable US deposits or more.
- Mid-size and smaller banks keep closing. This year, the Federal Deposit Insurance Corporation (FDIC) has closed 92 banks and depleted its deposit insurance money in the process.
- We still don't have detailed information on the trillions of dollars of loans the Fed handed out to the banking sector or about the quality of the collateral banks provided in return.
Nomi Prins is a senior fellow at the public policy center Demos and author of Other People's Money and Jacked: How "Conservatives" are Picking Your Pocket (Whether You Voted for Them or Not)