Wednesday, March 11, 2009
Many of the media are following the convention of assessing President Barack Obama's first 100 days in office. The term first was applied to new American presidents during Franklin Roosevelt's spring of 1933, when, between March and June, he proposed and Congress passed unprecedented federal programs: the Agricultural Adjustment Act, the National Industrial Recovery Act, the Securities Act, the Banking Act and others.
But Obama may wish to note that the term "100 days" derives from Napoleon's escape from Elba in March 1815, his brilliant reforming of an army, his march through France, and his final defeat by the British and the Prussians at Waterloo. It's up in the air which precedent will apply to Obama.
After 50 days on the job, the average of his job approval polls, according to RealClearPoltics, is 60.3 percent -- almost precisely average for such data on presidents since Richard Nixon. (It would be a little below average if Kennedy and Eisenhower were included.) His negatives in most polls are a little higher than average, which means that initially undecided members of the public are forming opinions a little faster.
Ronald Reagan's and Bill Clinton's numbers generally went up from this point in their presidencies; Nixon's and Carter's went down. So the polls don't tell us much.
But these polls do not yet reflect the effect on public opinion of his budget announcements. There are two likely effects, one obvious and predictable and the other subtler and more delayed.
The first is that those who are to be more highly taxed begin to know who they are. By proposing limiting charitable donations and mortgage interest deductions -- along with higher marginal and capital gains rates -- for the upper-middle class (and, in effect, most of small business), he not only threatens already-hard-pressed charities and churches but also pulls another support out from under real estate valuations.
By going straight at the nation's investors with tax increases, he risks undermining already-flagging investor confidence. All this Obama presumably already knew was the political and economic price for getting his hands on more taxpayer dollars to spend.
But vastly more dangerous to the Obama presidency (and the nation) was his decision to go full steam ahead to immediately start to transform health care; fight carbon dioxide energy sources with new taxations that will increase the cost of all energy, goods and services; and increase new expensive education entitlements as part of a federalization of American education.
It is this decision not to postpone those multiyear, multitrillion-dollar programs until the economy and the financial system are revived that exposes Obama's presidency to a possible catastrophic meltdown in its first term.
Obama not only is failing to focus more or less exclusively on protecting the financial system and the economy that depend on it but also is letting his ideological ardor drive him to expend both his own and his administration's attention, along with the vast new tax dollars, on those programs rather than on the financial and economic crises.
Thus -- and here is his political danger -- if the financial system fails (and much of the economy along with it), it will be a fair, true and politically lethal charge against Obama that he didn't do all he could as soon as he could to protect us from the catastrophe. It was this decision that shocked even some of his moderate supporters, such as David Gergen, David Brooks and others, who are muttering in private.
And this misjudgment is only compounded by the slow and inept start of Treasury Secretary Timothy Geithner, the man who has the line responsibility to fix it and who only this past weekend got around to nominating some of his vital sub-Cabinet officials. The failure of both Obama and Geithner, in the five months since the election, to come up with a plan to deal with the toxic assets and insolvency of major financial institutions may well look even more irresponsible than it already does if the derivatives crisis in fact hits the world.
The great whispered-about possible crisis that financiers and governments around the world shudder over is what to do about the more than quadrillion (thousand trillion)-dollar notional value of the world's derivatives (what Warren Buffett called the financial WMD) -- should that notional number become crystallized and, thus, real.
By comparison, the U.S. gross domestic product is $14 trillion; the U.S. money supply is $15 trillion. The GDP of the entire world is $50 trillion; the real estate of the entire world is $75 trillion; the world's stock and bond markets are worth about $100 trillion.
The notional $1.14 quadrillion (as reported by the Bank for International Settlements, which is in Switzerland) only becomes real (and frightfully dangerous) if either counterparty to a derivative goes bankrupt and if the defaulter is a major institution. Then it would start a cascade of cross-defaults that might well infect and bring down the world financial system.
It may well be that the U.S. government has put up $180 billion to sustain the solvency of AIG because of AIG's derivatives holdings. Our government may well need to spend trillions more before this is over on other tainted institutions and hope that is enough to hold off the derivatives catastrophe.
By trying to fix the financial system and the economy inattentively and with one hand tied behind his back (as he fritters away both attention and trillions on new health care and education entitlements and carbon use), Obama is betting so much more than his presidency. His willingness to take that risk is the chilling lesson of the first 50 days. Taking that risk itself is the political equivalent of a dangerously leveraged derivative.
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