WASHINGTON (Reuters) - How do you strike a balance between good politics and sound economics when trying to achieve financial stability?
That’s a question President Barack Obama has had to answer just weeks into his tenure at the White House. The results, so far, have been mixed.
Exhibit A, in the “could do better” column: Tuesday’s unveiling by Treasury Secretary Timothy Geithner of the administration’s plan to rescue the banking industry. Politically pesky details, such as the ultimate cost to taxpayers, were thin and stock markets fell.
Industry officials wondered just how the plan would work and average Americans questioned how much more would come out of their wallets to support the financial system and the high-living bankers who ran it.
“The politics and economics are opposing each other,” said Charles Trzcinka, professor of finance at Indiana University’s Kelley School of Business.
“The economists know that to save the banking system, more cash is needed, but Americans are furious at giving money to the bozos who caused the problem.”
Obama, who took office on January 20, is aware of that dilemma and has tried to balance the needs of the economy and the hopes of his political base.
He has expressed his own outrage, shared by the public, over how the first $350 billion of a government-run financial rescue plan was administered even while asking Congress for the second $350 billion tranche and potentially much, much more.
He tapped public scorn for big Wall St pay in grim times for the sector when he announced measures to cap compensation for top executives at financial institutions getting government funds. But the gesture was largely symbolic and stopped short of broader pay limits many observers had demanded.
Then Obama let Geithner — not as gifted a communicator as his boss — announce the latest banking moves.
Observers said market confusion may have stemmed from competing positions within the administration itself about how tight a leash to impose on the industry.
A New York Times report said Geithner had prevailed over senior advisers such as David Axelrod in preventing even tougher conditions on financial institutions.
Obama aides were reluctant to discuss any differences among administration officials.
“It’s clear there are divisions in the administration about where the financial bailout should be targeted as well as how much authority the government should gain over financial institutions,” said Princeton history professor Julian Zelizer.
“The best bet is that Geithner was vague on the detail because the administration has not settled what that detail should be.”
So was the plan ready at all? And what does that say about how the Obama team is working?
“Whether it’s incomplete or the American public just didn’t get the whole story yet, isn’t clear,” said David Miller, a partner in the Minneapolis law firm Faegre & Benson, who focuses on financial services and securities regulation.
“What is clear is that we were all left with a sense that a firm plan is not ready to be rolled out.”
As a public relations move, the announcement was a bomb.
“They did not answer the basic question of the old lady in the Wendy’s commercial: ‘Where’s the beef?’” said Indiana University’s Trzcinka, referring to the well-known restaurant chain advertisement.
White House Press Secretary Robert Gibbs insisted that the measures were ready and sought to play down the significance of the financial market reaction.
“The plan that was outlined was ready,” Gibbs said during a White House news briefing on Wednesday, the day after the unveiling.
“The plan wasn’t created, nor do I think it should be judged by a one-day reaction in any of those stock markets.”
Whether or not there were differences within the administration, the tensions remain between doing what is necessary to fix the financial system without alienating the voting public.
Significantly more money will be required, which may prove to be a tough sell for a man who campaigned on restoring U.S. fiscal responsibility.
Obama has promised to personally unveil the administration’s strategy for tackling home foreclosures and the wider housing crisis soon — measures that are bound to be voter-friendly.
But the market, ever attuned to dollars and cents, will want more specifics regardless of whether the moves are politically tough on the financial industry.
“The proof of whether you have a workable plan isn’t in whether or not you come down hard on banks,” said Robert Schnell, also a partner with Faegre & Benson. “The proof is in the details, and they were missing in action.”
On the home loans issue, the Obama administration is hammering out a program to subsidize mortgages, sources familiar with the plan told Reuters on Thursday. The plan under consideration would seek to help homeowners before they call into arrears on their loans, in contrast to current programs that only assist borrowers who are already delinquent.
The news fired financial markets, sending U.S. stocks leaping from session lows.
Additional reporting by Patrick Rucker, Editing by Frances Kerry