The Oval Office Behind The Curtains

You have been talking to the Doctor !  Explain ! Explain !

The immediate granular reactions to Obama’s budget, such as its ‘honesty’, education, EPA, armed forces personnel expansion, tax cuts, etc. are all important. We agree with the Center Left that the stimulus and budget are unlikely to generate the economic growth underpinning the budget’s out year projections. They are not audacious enough.

Geithner’s tepid approach to the banking crisis is probably a more revealing insight into the Administration’s psyche than the budget. He’s an odd pollyanna. His ‘worst case’ scenario of a 3.3% economic decline this year and flat 2010 followed by growth can only be a political prism divorced from economic reality. 2008 Q4’s over 6% decline merely highlights this.

AIG is on the precipice of tripartite tear down. CitiGroup and Bank of America/Merrill Lynch are insolvent as we speak for all practical purposes. Paul Volker correctly observed recently ‘some banks are too big to fail exist.’ The Administration’s expected increased government position in Citi is best seen as a band aid.

The Obama Administration is not nearly as honest as it needs to be. The banking/financial situation is far more important for future national expenditure possibilities than a budget. Which makes Geithner’s dithering on bank capitalization, ‘to nationalize or not dare use that word’ etc. all the more bizarre.

Our macro take despite the stakes is meh. Assuming American historical luck holds and we navigate a soft landing for banks and Obama’s budget is even 20% close to reality we believe American capacity for subsequent austerity to sustain deficit reduction is zero. American debt service obligations will be crippling by any objective standard. If the depression takes hold speed things up.

Sound American strategic foreign policy planning should begin to anticipate the existing and soon to explode ends means gap and adjust accordingly. Obama’s success or failure will only attenuate the timeline a bit.