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Don't Worry, Be Happy

Obama gives the markets the back of his hand.

3:45 PM, Mar 3, 2009 • By WILLIAM KRISTOL
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So the stock market drops over 25 percent since Election Day, almost 20 percent since Inauguration--and Barack Obama tells the American people at his press conference Tuesday not to "spend all your time worrying about that":

What I'm looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. You know, it bobs up and down day to day. And if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong.

But the stock market isn't gyrating, or bobbing up and down. It's dropping. And the reason it's dropping is that the financial system remains in desperate straits. Obama came close to acknowledging this when he continued:

Now, having said that, the banking system has been dealt a heavy blow. It has to do with many of the things that Prime Minister Brown alluded to: lax regulation, massive over-leverage, huge systemic risks taken by unregulated institutions as well as regulated institutions. And so there are a lot of losses that are working their way through the system. And it's not surprising that the market is hurting as a consequence. In fact, you know, I think what we're seeing is -- is that as people absorb the depths of the problem that existed in the banking system, as well as the international ramifications of it, that, you know, there's going to be a natural reaction.

But the markets were aware of the huge problems plaguing the banking system before Obama became president. Surely what they are reacting to now is his failure to address them. Obama has spent far more time publicly defending his stimulus package, and touting his health care, energy, and education proposals, than explaining how he's going to deal with the banking crisis. Yet virtually all serious observers--whatever their politics, whatever their economics--agree that the financial crisis is the central crisis we face, that the core of the problem is the banking system. But the administration has treated this as merely one "leg" of a three-legged stool (the other two are stimulus and housing), and the least urgent one to fix at that. And now Obama wants to focus on "long term" issues like health care and energy and education--while not showing any sense of urgency about the banking crisis.

Instead, the Obama administration throws more money at Citi and AIG. This at best simply puts off the day of reckoning (but at some considerable cost); at worst, Obama's Treasury is fiddling while Rome burns. And it's not as if there's that much disagreement across the political or economic spectrum as to what has to be done; everyone agrees the toxic assets have to be separated from the rest. And the disagreements about how to do this seem to some degree semantic ("nationalization" followed by selling off good assets vs. setting up a "bad bank" vs. public-private partnerships to buy and manage toxic assets, etc.). What spooks the markets, I believe, is that the Obama administration has shied away from embracing any solution. Under his administration, has a single toxic asset actually been seized, separated, sold, or de-toxified? I don't think so.

No, the stock market isn't like a tracking poll. Tracking polls were just about the electoral prospects of Barack Obama. The stock market is about real money, about the real livelihoods of real Americans. Obama's political advisors may have told him that dealing with the banking system will be politically difficult. Treasury Secretary Tim Geithner may want to build up his political capital after a rough confirmation before he steps up to the plate. Larry Summers may not want to endanger his chance to be Fed chairman by being identified with an unpopular bank "bailout". I'm told almost every theme in Obama's speech last Tuesday night was focus-group tested--and the speech played pretty well politically. But the markets weren't impressed. Isn't it time for Obama and his team to get up the nerve to stop playing politics and to govern?

William Kristol is editor of THE WEEKLY STANDARD.