In a major Wall Street speech just blocks from the New York Stock Exchange, Obama will outline the steps he took after entering the White House at a time of investor panic, and say his administration staved off a second Great Depression.

Aides say he will then refocus attention and issue a call for action on financial, regulatory and structural problems still dogging the slowly-reviving economy, which he believes will underpin long-term recovery.

“We are making a clear transition from rescue as the priority of public policy to sustained recovery,” said Lawrence Summers, director of Obama’s National Economic Council.

“We have moved back from the brink of financial catastrophe to a set of very important problems that need to be managed.”

The speech, scheduled for 12:10 pm (1610 GMT), comes a week before Obama hosts the next Group of 20 summit in Pittsburgh, where global economic powers will try to agree a strategy to head off future crises.

In recent weeks, as economic indicators have suggested glimmers of hope, the White House has pointed to evidence Obama’s approach is reaping dividends, last week arguing that his huge, politically-risky 787-billion-dollar stimulus plan had created or saved up to 1.1 million jobs.

This followed a flurry of polls showing that, conversely, most Americans believe the stimulus plan is having no impact.

Obama staunchly defended his stimulus in a Sunday interview on CBS “60 Minutes.”

“The reason we did so was that every credible Democratic and Republican economist at the time when we came in said, ‘If we don’t have a stimulus of some sort, then this is potentially going to get a lot worse,’” Obama said.

“When I walked in, the banking system, the financial system was under the verge of collapse.”

Officials now predict a possible return to positive economic growth in the third quarter this year — a moment that will mark a political milestone for the administration.

“When the president was elected and in transition, the issue… was whether recession would become depression,” said Summers.

“Today, the question is when the recession phase will end. That is not, in our judgment, an accident.”

As well as his huge stimulus, Obama invested hundreds of billions of dollars bailing out the indebted financial sector, unveiled mortgage rescue plans and took steps to loosen the flow of credit.

Though the White House argues its policies are working, officials admit there is much economic pain to come — and predict that even in recovery, unemployment will hit 10 percent.

Meanwhile, The New York Times argued in an editorial that the important work of regulatory reform remained undone.

“The administration has proposed legislation that would bring most of the financial system under a regulatory umbrella, and impose higher capital requirements to cushion against losses,” the newspaper noted.

 ”But in specific areas, like consumer protection, Obama officials will have to fight to ensure that lawmakers do not water down the administration’s intent.” 

The administration’s next big challenge will come in managing the transition out of the industrial and financial sectors and purging what Obama has branded a “culture of irresponsibility” on Wall Street.

Obama, said one administration official, will “urge the financial community to take responsibility, not only to support reforming the regulatory system but also to avoid a return to the practices on Wall Street that led us to the financial crisis, and to recognize their obligation to help produce a wider recovery on behalf of the American people.” 

His address will come exactly a year after the shocking collapse of banking giant Lehman Brothers, which was followed by a severe credit crisis, government interventions to help secure markets, and downturns that pushed some of the biggest economies in the world into recession. 

http://uk.biz.yahoo.com/14092009/323/obama-defend-bailouts-year-lehman-collapse.html

Monetary policy, the regulatory agencies concede, is insufficient to prevent asset price bubbles. So a second tool is needed. But what should that be? Don’t ask the Treasury, because they don’t know. If they did, we wouldn’t be enduring the worst economic crisis since the Depression of the 1930s.

How About an Inquest?

 Following the massacre in the markets, the bodies are strewn all around as evidence that something went terribly wrong. Economists failed to alert governments of the impending collapse in the financial sector. And yet, curiously, there has been no forensic examination of the tools employed by forecasters to explain their failure.

In the US, 13,000 people apparently earn their living “doing” economics. That’s according to Professor Robert Samuelson, son of the Nobel prize winner Paul A. Samuelson. He finds it “intriguing” that most economists failed to predict the financial crisis. There is no compelling explanation for this failure, writes Samuelson in The Washington Post (July 6). Because “economists have not engaged in rigorous self criticism to explain their lapse”.

There is nothing mysterious about the unwillingness to scrutinise their failure. The answer is simple. Economics is not practiced as a science. Rather, it is a pretentious way to covertly promote political prejudices. The last thing that economists need is an inquest. But that leaves the UK Treasury mute about the “macro-prudential” tools needed to prevent the next property boom/bust.

They Protest Too Much

Economists love shouting about the failures of others to disguise what they don’t know. Take the case of Paul Krugman, whose competence is such as to apparently warrant a Nobel prize. In a New York Times column (July 3) he admonishes the Obama administration for an inadequate fiscal stimulus programme to cope with a shortfall in jobs of about 8.5m.

Krugman does confess that “as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role. It has been a rude shock to see so many economists with good reputations recycling old fallacies”.

But can we trust Krugman to add up simple numbers? He takes exception to the manipulation of employment figures, but his over-priced textbook on economics claims that the rent of land in the US is just 1% of national income.  Since it’s probably more like 33%, we need to treat the pronouncements of people like Krugman with a pinch of salt.

Camouflaging the Root Cause

No government in the world has shown the slightest inclination to highlight the root cause of the financial crisis. The incentives to create credit on a reckless scale are located in the land market. Ever since the early 17^th century, governments have held enquiries into financial crises following savage bouts of land speculation . Despite all the agonising, however, not once did they remove the rewards to prevent such episodes recurring.

This time, the rush over the financial precipice started in the US. There, bankers had found yet another way to milk the land market. They targeted low income black neighbourhoods with  high-cost/high-risk mortgages, knowing (so clever were they) that they would not bear the risk. Those risks would be sold to mugs like pensioners whose funds would buy the securitised mortgages.

Twisting and turning the bank regulations after this last episode will not prevent the bankers inventing new ways to milk the land market towards the end of the next business cycle that begins in 2010. That’s why the UK’s White Paper on financial regulation isn’t worth the paper on which it is written.

According to Andy Haldane, the Bank of England’s financial stability director, there remain many “unanswered questions”. That’s the clever economist’s way of distracting us from the fact that the coroner has yet to ask the right questions.

For the next series Part 3 Income Tax click here