Napoleon’s advice to President Obama about the financial crisis

Summary:  Team Obama has chosen the soft path to economic recovery.  Spend money while stalling any substantial reforms.  No confronting our deep structural reforms, just wait for the recovery due later this year.  It might work — reliable forecasts are difficult or impossible these days — but its failure would leave us far weaker, making a next round of solutions more difficult.

The Obama Administration’s economic strategy rests on two assumptions:

  1. The economy will recover sometime in the second half of 2009, and
  2. If the recovery does not arrive on schedule, then they can take stronger measures.

I believe both are wrong.

Will the economy recover soon?  We are on unknown territory, with governments around the world applying fiscal and monetary stimulus on a scale never before attempted (outside wartime).    The total stimulus — expansion of the Fed’s balance sheet plus fiscal stimulus — is 17% of GDP. It’s aprox 8% in Europe, and a staggering 26% of GDP in China.  (figures from a new report by Nomura).  There are few post-WWII precedents for this, so forecasts of econometric models are unreliable.

Jim Grant, editor of Grant’s Interest Rate Observer, put this in perspective:

In {the April 3 issue} of Grant’s Interest Rate Observer, Jim Grant put together a fabulous chart showing the amount of stimulus as a percentage of GDP, both monetarily and fiscally, for this downturn compared to the last 13 recessions. For those, the cumulative monetary stimulus was about 6%, while thus far in this single recession, it has been 18%. In those prior recessions, the amount of fiscal stimulus as a percentage of GDP summed to about 33.2%.

Thus far — and I do emphasis thus far — the government has only ginned up 11.9%, which sums to 29.9% for the combined stimuli, compared to a cumulative total of 39.3% of the prior 13 recessions. When this recession is compared to the Great Depression, the amount of stimulus having been applied so far is almost four times as high, even though thus far GDP has dropped only 1.8%, versus 27% in that collapse.

The Daily Rap, Bill Fleckenstein, 20 April 2009 (subscription only)

{W}hat is truly momentous is the government’s response. Nothing like it. So there have been 11 recessions/depressions since 1929. On average, the sum of the fiscal and the monetary response as we index them is like 2.9% of GDP. What is shaping up now, in sight and prospectively, is 29% of GDP. Ten times the average response. Now in the Great Depression, before the dawn of Keynesianism, this is three times that response for a recession that is 1/15th the magnitude of the Depression. … They’re probably not done yet. — Jim Grant, interviewed by Larry Kudlow.  Source: transcript of the 15 April broadcast of The Kudlow Report

This is an experiment on a scale never before attempted.  In some ways it makes the New Deal look like a cakewalk, a vastly larger stimulus by a far more indebted government.  We can only wait to see the results.  But if it does not work, then Team Obama can still respond effectively.  At least, that is their assumption.

Policymakers are loath to amputate when they might be able to nurse a limb back to health. Some think in terms of reversible error – preferring to take steps that can be revised later if necessary – and there is a general aversion to taking high-risk steps that could do more harm than good. “Governments should practise the same principles as doctors – first, do no harm,” said Mr Obama this month, rejecting pre-emptive government takeovers that could threaten confidence.

An important feature of many policymakers’ thinking is that this is not their last shot – that they are still early enough in the life of the crisis to come back and try again with other, more forceful measures if it does not work.

Still, the administration’s capacity to muster what it takes to intervene decisively could diminish over time. At MIT, Prof Johnson says the politics of bail-outs could get worse rather than better, while Mr Obama’s approval ratings could diminish.

Yet even critics think the administration may get lucky and do just enough to allow the US to muddle through. … “It could all work out – who knows?” says Prof Rogoff. “But there is certainly a chance that what they are doing will end up costing more and prolonging the recession.”

— From “Steeled for stress“, Financial Times, 20 April 2009

This is a reasonable but high-risk strategy.  It avoid confronting our deep structural problems, avoids a death-struggle with the powerful financial oligarchs — it’s the safe path that risks destruction.  Another possibility is that the this passivity — spending money but otherwise doing little — will allow the rot to spread through the economy.  Confidence might diminish, along with Obama’s political capital.

This strategy recklessly burns our financial resources fruitlessly attempting to stabilize the banks.  Worse, it squanders Obama’s greatest resource:  time.  Time is the most important and scarcest resource.  Obama needs faster and bolder action now, with reorganizing and recapitalizing the banks as step #1.  As Napoleon wrote to Chef de Brigade Coulbert (12 January 1803):

“Go, sir, gallop, and don’t forget the world was made in six days. You can ask me for anything you like, except time.”

For more about this see

  1. Obama makes his first major policy error, 27 February 2009 — My analysis.
  2. Irreversible Damage: Why Little Action on Banking Can Do Great Harm“, Simon Johnson and Peter Boone, New York Times, 23 April 2009.

Originally published at Fabius Maximus and reproduced here with the author’s permission.

5 Responses to "Napoleon’s advice to President Obama about the financial crisis"

  1. CHRIS DAVIS   April 30, 2009 at 1:16 am

    In defense of the “One”:o What was bad debt/GNP ratio vs. total debt to GNP ratio in previous recessions??o “fruitlessly stabilize the banks”? Banks aren’t stabilized? Yield curve hasn’t flipped? Dow didn’t soar from 6600 to 8200??o “Policy makers loathe to amputate”, etc: Bear,Stearns? Lehman? GM?o Structural reform: no problem, if you’re willing to get rid of Schumer, Dodd, Frank, Pelosi; change Delaware company law; ban financial intermediary default voting of shares; mandate clawback of banker bonuses earned from systemic crashes; regulate CDSs; reregulate securitization of debt; institute Canadian style required maturity matching of assets and liabilities for financial intermediaries, etc., etc., etc.o Economic recovery:everyone is fixated on balance sheets; no one looking at continuing global tech revolution. Why take cue from idiots who couldn’t even reinvest low cost repo funds without screwing that up? How bright do you need to be to invest 2% money @5%?(Hint: brighter than Wall Street). Beating counterproductive bankers back to original per cent of GNP/income take will be a huge plus for economyas misallocators of capital are made redundant. Fuck them.

    • Guest   April 30, 2009 at 3:47 pm

      What silliness, the real numbers show a far gloomier picture than the rainbow and unicorn farts spouted by MSM.Bernanke totally got the taxpayer spanked today on T10s to the tune of 300B (See today’s chart on Tyler D., or Karl Denninger’s site.Obama is running this country into the ground. He’s one big photo op with a teleprompter.I suggest you look behind the curtain.

  2. Guest   May 13, 2009 at 12:33 pm

    Go Canada!

  3. Guest   May 13, 2009 at 12:34 pm

    I think both comments were more interesting than the article, the article was full of fallacies.

  4. Guest   May 13, 2009 at 12:35 pm

    The funny part is dems and reps are behind the same curtain pushing buttons.