Tuesday, February 10, 2009

President Obama's understanding of the economy and the near future

From last night's press conference. It's a pretty coherent explanation about where we are, and where he sees us going. It may not be perfect in all regards, but it combines a specific reading of current events with a thoughtful nod toward long-term challenges.

Chuck Todd, NBC: Thank you, Mr. President. In your opening remarks, you talked about that if your plan works the way you want it to work, it's going to increase consumer spending. But isn't consumer spending or overspending how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first before they start spending money into the economy?

President Obama: Well, first of all, I don't think it's accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies based on shaky assets. And because of the enormous leverage where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system. That led to a contraction of credit, which in turn meant businesses couldn't make payroll or make inventories, which meant that everybody became uncertain about the future of the economy, so people started making decisions accordingly — reducing investment, initiated layoffs — which in turn made things worse.

Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined and this economy has been driven by consumer spending for a very long time — and that's not going to be sustainable. You know, if all we're doing is spending and we're not making things, then over time other countries are going to get tired of lending us money, and eventually the party is going to be over. Well, in fact, the party now is over.

And so the sequence of how we're approaching this is as follows: Our immediate job is to stop the downward spiral, and that means putting money into consumers' pockets, it means loosening up credit, it means putting forward investments that not only employ people immediately but also lay the groundwork for long-term economic growth. And that, by the way, is important even if you're a fiscal conservative, because the biggest problem we're going to have with our federal budget is if we continue a situation in which there are no tax revenues because economic growth is plummeting at the same time as we've got more demands for unemployment insurance, we've got more demands for people who've lost their health care, more demand for food stamps. That will put enormous strains on the federal budget as well as the state budget.

So the most important thing we can do for our budget crisis right now is to make sure that the economy doesn't continue to tank. And that's why passing the economic recovery plan is the right thing to do, even though I recognize that it's expensive. Look, I would love not to have to spend money right now. This notion that somehow I came in here just ginned up to spend $800 billion, that wasn't — that wasn't how I envisioned my presidency beginning. But we have to adapt to existing circumstances.

Now, what we are going to also have to do is to make sure that as soon as the economy stabilizes, investment begins again; we're no longer contracting, but we're growing; that our midterm and long-term budget is dealt with. And I think the same is true for individual consumers. Right now, they're just trying to figure out, how do I make sure that if I lose my job, I'm still going to be able to make my mortgage payments. Or they're worried about how am I going to pay next month's bills. So they're not engaging in a lot of long-term financial planning.

Once the economy stabilizes and people are less fearful, then I do think that we're going to have to start thinking about how do we operate more prudently, because there's no such thing as a free lunch. So if you want to get — if you want to buy a house, then putting zero down and buying a house that is probably not affordable for you in case something goes wrong, that's something that has to be reconsidered.

So we're going to have to change our bad habits. But right now, the key is making sure that we pull ourselves out of the economic slump that we're in.


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