Stephen’s Posterous

Karl Rove, the former senior adviser and deputy chief of staff to President George W. Bush, writes in his weekly Wall Street Journal editorial that President Obama has not fulfilled his promises about the economic stimulus package.

Mr. Rove writes:

If you're Barack Obama, you redefine your goals and act as if America won't remember what you said originally. That's a neat trick if you can get away with it, but Mr. Obama won't. His words are a matter of public record and he will be held to them.

The effects of the stimulus package was supposed to be immediate, but the promised jobs and growth have not materialized. Mr. Rove writes that Mr. Obama is attempting to lower expectations retroactively by writing in an op-ed in Sunday's Washington Post that his stimulus "was, from the start, a two-year program." Mr. Rove writes that this is misleading.

Mr. Obama said that his goals of the stimulus package were to create or save 4 million jobs and his Council of Economic Advisors issued an official analysis showing that the unemployment rate would top out in the third quarter of 2009 at just over 8%.

Unemployment is now at 9.5%, up from 7.6% when Mr. Obama took office. There are 2.6 million fewer Americans working than there were on the day Mr. Obama was sworn in. Mr. Obama says now that unemployment will exceed 10% in 2009 and his advisers say it will remain high through much of  2010.

The stimulus money was supposed to be spent immediately, but only 7.7% of the stimulus has been spent in 6 months. More will be spent in the program's last eight years than its first year. Mr. Rove believes that Mr. Obama's stimulus bill will force a huge and perhaps permanent increase in discretionary, domestic spending by the U.S. government.

Mr. Rove ends by writing:

While in Moscow recently, Mr. Obama answered questions on whether his administration had misread the economy by saying "there's nothing that we would have done differently." Let me suggest two things: He could have proposed pro-growth policies rather than ones that retard economic recovery with a massive increase in deficit spending. And he could fulfill his promise to speak to us honestly rather than selling his proposals with promises and goals he rapidly discards.

In his 1946 essay "Politics and the English Language," George Orwell wrote about words used in a "consciously dishonest way." "That is," Orwell wrote, "the person who uses them has his own private definition, but allows his hearer to think he means something quite different." Americans are right to wonder if their president is using his own private definitions for the words he uses to sell his policies.

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Karl Rove, former Senior Advisor to President George W. Bush, writes that President Obama's decisions will eventually lead to higher inflation, higher interest rates, higher taxes, sluggish growth, and a jobless recovery.

The Labor Department is expected to report unemployment over 8 percent with 200,000 more jobs lost in May 2009. Congressional Budget Director Douglas W. Elmendorf predicts that unemployment will continue rising into the second half of next year and peak above 10%.

Mr. Rove says that President Obama describes job losses as job gains. The President does this by estimating how many jobs are saved because of his Stimulus Package. The Labor Department does not collect data on jobs saved. Mr. Rove calls this President Obama's, "Clairvoyant ability to estimate."

However, the former National Economic Council Director Keith Hennessey said on his blog that the stimulus will be ineffective because the additional economic growth it spurs will come six to nine months later than it could have. This is due to the fact that only $185 billion of the Stimulus Package will be spent this fiscal year.

Also, much of the Stimulus Package has been saved, not spent, since the national savings rate has risen from 0% to around 5%.

Mr. Rove says for the Stimulus Package to be more effective, it should have been front-loaded into this fiscal year. He thinks that President Obama's Team idea that each dollar spent for the Stimulus Package translates into a dollar-and-a-half in growth is fiction. The costs of stimulus reduces future growth.

Mr. Rove writes:

No country has ever spent itself to prosperity. The price of stimulus has to be paid sometime.

The real improvements in the economy are the result of the expanded money supply by the Fed and the U.S. Treasury helping the financial sector.

Mr. Rove believes that the Fed's actions are risky. Easy money and expansionary policies are not sustainable. Inflation may be just around the corner unless the government can collect the money back. He also belives that government will likely hamper private investment because the government will need a lot of capital to finance its debt.

Mr. Rove writes:

It is becoming clear that the economy is now the top issue. Mr. Obama's presidency may well rise or fall on it. The economy will be his responsibility long before next year's elections. Americans may give him a chance to turn things around, but voters can turn unforgiving very quickly if promised jobs don't materialize.

Mr. Rove says that Obama's honeymoon allowed him to push for the largest expansion of the government in U.S. History.

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Since Congress approved the $787 billion economic stimulus package in February 2009, venture investors have been eyeing the money earmarked for energy projects.

Lawyer Sylvia Burks, a partner at Pillsbury Winthrop Shaw Pittman LLP, has been monitoring the process of implementing those programs. Burks, who will be a panelist at the Dow Jones Alternative Energy Innovations conference April 21 and 22 in Redwood City, Calif., talked with VentureWire about how the money will be distributed.

How much of the $787 billion is actually set aside for energy programs? Is $65 billion about right?

I think that’s probably on the low side. You may see it up to $90 billion.

How much of it might be available to emerging companies?

That’s a much smaller amount. The whole intent behind the stimulus bill is to get companies up and running and to get employment up. Most of it is for later-stage companies that need to start manufacturing, to build solar farms or wind farms. For smaller companies I would say probably 10% of the total that’s set aside for green spending.

Has this started to generate some interest among venture-backed companies?

Absolutely. There is a tremendous amount of interest and a tremendous amount of lack of understanding as well. As I said, most of this money is used for companies that are later-stage. So for the nascent technology that’s looking for money for research and development, there is not as much of that.

Another thing is that some of these existing divisions, departments and regulatory agencies have been allotted money, but they have not yet gotten applications and procedures in place that would allow them to actually give the money out. A very good example is the ARPA-E, which is the advanced research project for energy. They don’t have a director in place yet much less any type of procedures for applying for that money.

When might these programs be up and running?

It’s 60 days for some, 90 days for some and with respect to some there’s no deadline. Everything we hear is that they are very, very understaffed and so it’s not happening as quickly as people would like. The conditional loan guarantee for Solyndra was the first big announcement of stimulus money having been allotted. The second one was the announcement on April 15, 2009, by Energy Secretary Steven Chu of the $41.9 million with respect to the fuel cells.

Are you optimistic that this money will get put out in a timely fashion?

I think everyone is a little bit circumspect about whether that will happen. I think there’s lots and lots of pressure for it to happen but then on the other hand there’s a lot of risk aversion, too, on the side of the regulators who are doing this.

The private sector is motivated by making money. The government doesn’t have that same incentive. Instead, I think, their incentive is risk avoidance. So if anything there is going to be too little risk taken.

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FT: Thank you for doing the interview Mr President.

Obama: My pleasure, I read the Financial Times before other people read the Financial Times. Now it’s trendy and everybody carries around a Financial Times.

FT: Let’s talk about the G-20. What will be your benchmarks for success?

Obama: The most important task for all of us is to deliver a strong message of unity in the face of crisis. There’s some constituent parts to that. Number one, all the participating countries recognise that in the face a severe global contraction we have to each take steps to promote economic growth and trade; that means a robust approach to stimulus, fighting off protectionism.

Next, we have to make sure that we are all taking serious steps to deal with the problems in the banking sector and the financial markets and that means having a series of steps to deal with toxic assets and to ensure adequate capital in the banking sector.

Third, a regulatory reform agenda that prevents these kinds of systemic risks from occurring again and that requires each country to take initiative but it also requires coordination across borders because we have a global, we have global capital markets, and that will include a wide range of steps, additional monitoring authority coordination of supervisors and various countries dealing with offshore tax havens. Making sure that…

FT: Is that a problem? Offshore tax havens.

Obama: Well, its something that is going to be discussed. I know that in my discussion I think there is a concern that we don’t want people to be able to game the system or circumvent regulated capital markets and making sure our regulations are targeting not just banks but any institution that could pose a potential systemic risk to the system.

A final area of concerted action involves international financial institutions and their capacity to assist emerging markets in developing countries at a time when those markets could be under even more severe strain then some of the more wealthy nations and I think making sure that institutions like the IMF have the resources to provide such assistance that world food supplies are not imperilled as a consequence of the break down in global trade, those are all issues that I think have to be addressed.

Now, I’m confident based on conversations that I have this week with Angela Merkel, Sarkozy, as well as with Kevin Rudd as well as conversations that I have had previously with Gordon Brown and others, that there is already a rough consensus there that by the time we arrive in London we will have taken, we will have made significant progress in moving in the right direction.

FT: Let’s just talk about the stimulus for a moment. At the moment there has been a 1.8 per cent GDP boost in 2009 by the G20 nations. There are concerns among economists that you need a sustainable stimulus and therefore 2010 is key. Will you get secure commitments from say, the Europeans, for action if necessary in 2010?

Obama: Two points I want to make on this, Number one: The press has tended to frame this as an “either or approach”. There are some G20 participants that are arguing fiercely for stimulus, others for regulation. What I have consistently argued is that what is needed is a “both and approach”.

We need stimulus and we need regulation. We need to deal with the problems right in front of us and we also need to make sure we’re taking steps to prevent these types of breakdowns from happening again.

With respect to the stimulus, there is going to be an accord that G20 countries will do what is necessary to promote growth and trade. I think there is a legitimate concern that, would most countries already having initiated significant stimulus packages that we need to see how they work.

Obviously I admire economists. I have a bunch of them on my staff. But to start making a whole host of plans about next year, without having better information on how the current stimulus efforts are working, is something that I think is of concern.

So what we are going to see is what the United States has led on this. We have been very aggressive in terms of our recovery package. The way our recovery package is structured, money is going out both in 2009 and 2010.

But each country has its own constraints, its own political rhythms and what we want to just make sure is that everybody is doing something, everybody recognises the need to make progress on this front and that we are prepared to step into the breech should current efforts prove to be inadequate.

FT: I mean that is really the great challenge, in managing this crisis - bridging the gap between what is economically absolutely necessary and what is politically possible. How do you bridge that?

Obama: That’s one gap. Then there’s a gap in ideas about how to approach a crisis like this, especially among economists - although on the issue of the stimulus there seems to be much broader consensus among both conservative and liberal economists that stimulus is appropriate.

You know, the financial crisis hit the United States first; it is now being experienced around the world. Not surprisingly we took some very aggressive action earlier than some other countries because its impact had been felt most immediately on Wall Street.

As other countries start experiencing these drastic declines in GDP and in their exports I think that the sense of urgency has grown and you are going to start seeing a convergence.

In all countries there is an understandable tension between the steps that are needed to kick start the economy and the fact that many of these steps are very expensive and tax payers have a healthy scepticism about spending too much of their money, particularly when it is perceived that some of the money is being spent not on them but on others who they perceive may have helped precipitate the crisis.

So that is always going to be a challenge and what’s also difficult is the fact that the policies we initiate all take time to take effect and by its very nature politics looks for more instantaneous gratification.

But I am confident that the American people, and I think people around the world, are looking to its leaders to lead and that some of the steps we have already taken are starting to bear fruit. We’re seeing glimmers of stabilisation in the economies and we haven’t yet seen…

FT: Glimmers of stabilisation?

Obama: Here in the United States for example, you’re starting to see pockets of stabilisation in the housing market. Our housing plan has led to the lowest interest rates, mortgage rates in a very long time and you are starting to see a huge number of refinancing in the banking sector.

In certain select markets, like the market for auto loans or the market for student loans, Secretary Tim Geithner’s efforts to provide a market for asset-backed securities has helped and so we still have a long way to go, but I am confident that if we are persistent and we don’t approach this with a thought that there is a silver bullet out there but instead are willing to try a range of methods to deliver on the economic growth in jobs that we will get out of this current crisis.

FT: You mentioned the risks and dangers of protectionism. 73 separate measures have been identified by the World Bank since the last G20 summit so what again in practical terms can your administration do at the G20 to stop this - and I’m thinking to whether there are real risks that people worry in Europe a lot about what is going on, on Capitol Hill, with “Buy American” provisions.

Obama: Well first of all I think it’s important to note that here in the United States, despite some protectionist rhetoric and very real economic frustration growing out of the collapse of the financial markets and the huge rise in unemployment that the “Buy American” provision that was in the stimulus package was specifically written that had to be consistent with WTO. That the Mexican trucking provision is now subject to negotiations to ensure that we don’t see an escalating trade war.

I have sent a very clear signal that now is not that time to offer hints of protectionism and I will continue to discourage efforts to close off the US market. I think that in a democracy, there are always going to be some loose ends out there.

That’s true here, that’s true around the world but overall I don’t think that we’ve seen a huge rush to protectionism that that isn’t the rhetoric that is emanating from the leaders that will be gathering in London.

And to the extent that the American people or Europeans or Asians, Africans, Latin Americans all feel confident that their leaders are doing everything that they can to encourage and promote economic [..] and that they have their populations interests at heart, I think we are going to be able to hold the line on any significant slippage.

FT: I wondered Mr President whether you’re concerned that, particularly following the AIG bonus controversy, there’s some danger that confidence that business has in the rule of law in the United States has been shaken and that could hinder some of these recovery measures?

Obama: I think it is a source of concern in some quarters. To the extent that the captains of industry recognise very legitimate frustrations that the American people feel when they read about huge bonuses going to members of firms that are receiving large tax payer bailouts.

I think they can take steps to lessen that danger and I met with some bankers today and it was a constructive conversation but one of the points that I made is that a time when everybody is needing to sacrifice there has to be a similar sense of sacrifice on the part of those various sectors of the economy that helped to precipitate this crisis and to the extent that they’re showing restraint that compensation packages are structured so that there is some deferral until money is returned to tax payers and the economy recovers that will be good for everybody. That will put [...] in a stronger position to help them.

But you know, keep in mind that although there are going to be, I think, emotional reactions to and legitimate grievances around some of these issues, the United States has been the world’s most successful economy precisely because of a long standing respect for legal contracts and orderly transparent and open market operations and that’s not going to change.

FT: Mr President, given the rising tendency to populism on Capitol Hill and elsewhere, do you feel confident that at a time like this you can go to Congress and ask for the kind of backing of capitalisation that most economists say will be required in the near future?

Obama: I think it is very important for us to show that the money that has already been authorised is being well spent. That it is helping to result in loans going to small business and large business that are in turn investing and creating jobs. If voters perceive that it’s a one way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe then it’s harder to make an argument for further intervention.

If on the other hand people start saying that they can refinance their house, and their child can get a student loan and that small business is able to retain its credit line, so that there is a tangible and meaningful result from our measures, then I think we can win back the confidence of the American public.

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With the US and other countries monetizing budget deficits, the chance of rapid inflation has surged. The annual production of gold, the traditional hedge, is far below the world’s rate of monetary growth. An inflationary panic could thus bring an explosive gold price rise.

Gold has little intrinsic value; if it had never been coined its price would probably rest around the $250 per ounce of the late 1990s. However because of its history it is regarded as an inflation hedge and store of value, and that psychological association becomes tighter as inflation worsens and the gold price rises. Hence arguments about the irrationality of gold investment are wrong: in an inflation-prone environment belief in gold becomes self-reinforcing.

Alternative safe-haven stores of value, such as foreign currencies and US Treasuries, are falling away as the Swiss and Japanese authorities seek to weaken their exchange rates and the US runs ever-greater deficits.

In the stagflationary conditions of 1980, the gold price peaked at $875, the equivalent of $2,300 today. However the rise to 1980’s inflation levels was gradual; monetary policy in the 1970s was only moderately over-expansive and the US fiscal deficit was modest by current standards.

Including the Fed’s March 18 announcement of further monetary stimulus, monetary and fiscal policies in the US and globally are far more inflationary than in the 1970s. Consequently, there’s a real threat that if inflation returns, it will do so violently.

Smart investors are hedging against this possibility through gold. Hedge fund tycoon John Paulson paid $1.28bn for 11.3% of AngloGold Ashanti. That company is unprofitable at present gold price levels, but would hugely benefit from a price rise.

Should other hedge funds turn to gold, its price could soar. At current prices, annual gold output is worth only $104bn and the global gold stock only $5.12 trillion. Central bank gold reserves total $895bn, a fifth of currency in circulation. Even a quintupling in the gold price, to $5,000 per ounce, would raise the value of annual gold production only to $500bn and the global gold stock to $25tn, just 20% above the world’s M1 money supply.

Recent bubbles in stocks, housing and commodities have been driven by easy credit. The ongoing US Treasury bond bubble is driven by desire for a safe haven. When it collapses, a gold bubble driven by inflationary concerns may be inevitable.

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 The 651,000 decline in US non-farm payroll employment last month is nasty, but the rate of job loss has stopped accelerating.

The Obama administration's stimulus package should provide a short-term economic boost soon, so a bottom to the economic downturn may be approaching, but that doesn't mean an upturn follows quickly, sorting out the budget deficit and inflation will come later.

Upward revisions in job loss figures for December and January mean that February’s decline was less severe than in previous months, suggesting a slight decrease in the rate of job loss. Moreover, the Institute for Supply Management’s February manufacturing and non-manufacturing indexes, respectively flat and down only slightly compared with January, also suggest that the pace of economic decline may be slowing.

However, that doesn’t suggest the economic bottom is imminent, but it does lessen for the moment fears of accelerating decline on the trajectory of 1929-32.

Whatever its long-term effects, the US economic stimulus should produce some bounce in the second quarter as modest tax cuts flow into low and middle-income wage packets and public sector hiring creates jobs. There is thus some possibility of a bottoming-out of economic activity by mid-year.

Whether or not that occurs, a slowing of job losses would help boost confidence in the consumer and small business sectors, further lessening the chance of decline becoming self-reinforcing.

The prospects for a rapid return to economic growth are less reassuring. Labour productivity, which declined by 0.4% in the fourth quarter last year, is likely to remain weak, with tight credit conditions correcting the excessive capital investment of the bubble period.

Consumption will probably remain subdued in spite of extensive government attempts to revive it, as savings rates return towards or even rise above their long-term average of around 8%.

Excessive budget deficits and the possibility of resurgent inflation caused by over-stimulative monetary policy may well raise interest rates considerably, further holding back recovery. That could result in an L-shaped recession, with no real recovery for several years. But even that would be better than a seemingly bottomless economic pit.

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The US government is straining every sinew to slow the housing market’s descent.

The latest details on a $75bn package of incentives and loss-sharing on home modifications reflects a level of nuance befitting the programme’s complex aims. Delaying the fall of house prices to market clearing levels may be unfortunate. But the scheme, aiming to modify up to 4m home loans, is of sufficient scale to put a dent in foreclosures and mitigate a downward spiral in values in the worst affected areas. Challenges, however, remain.

The key is to modify the “right” loans. The Treasury is putting great weight on calculating whether the net present value of expected cash flows on loans would be higher when modified or when left alone. That could weed out hopeless cases, while requiring a signed affidavit of financial hardship might deter chancers. But the assumptions used are crucial.

A cap on the discount rate prevents servicers from using a high rate to make modification appear uneconomic. But servicers with books over $40bn, which includes the top 15 with about 75 per cent of the market, according to National Mortgage News, can base redefault rates on their own portfolios. More than 40 per cent of loans modified in the second quarter of 2008 were 30-days delinquent again after three months, so that input could justifiably be high.

In spite of government incentives to both borrowers and servicers, it also remains unclear whether the scheme can reach the 20 per cent of mortgages, which are generally lower quality, within private-label securitisations. Apart from the logistical challenge of reaching reams of bondholders, those in junior tranches may have little incentive to acquiesce. Carrying out loan modifications for this group probably requires getting the trustee on board and inducing senior noteholders to share any gains with their juniors. There are more heads to knock together yet.

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With the Dow Jones Industrial Average below 7,000 at 6,763, the US stock market is well below its early 1995 level, adjusted for changes in nominal GDP. That suggests it’s cheap, if growth prospects are as good as they were back then. The risk, however, is that too much fiscal and budgetary stimulus will bring on growth-stultifying inflation.

On December 5, 1996, the Standard and Poor’s 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market’s “irrational exuberance”. At its March 2, 2009, close of 700.82 S&P 500, the market is clearly exuberant no more.

It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress on February 23, 1995, the day the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95% increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.

Standard and Poor’s currently projects 2009 earnings on the S&P of $48.10. Over the 20-year period to 2008 the index traded at an average of 19.4 times earnings. That would give a current value of 933.14. That 20-year period however includes the 12-year bubble; taking a longer-term average of around 15 times earnings gives a valuation of 721.5, again, just slightly above the current level.

So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However, that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average. That’s where doubts creep in.

If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 “crowd out” private investment, then growth and earnings prospects for the next few years would be below average.

In that event, the market as it stands today would be overvalued. Bailouts and stimulus can thus produce long-term uncertainty as well as short-term uplift.

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Ken Moelis, who built a name for himself at some of Wall Street's best-known banks during the past three decades, founded merger advisory firm Moelis & Company in July 2007 and has been hiring at a rapid pace ever since.

After starting his career at Drexel Burnham Lambert, he moved to Donaldson, Lufkin & Jenrette and helped DLJ gain prominence in the 1990s as a high-yield bond underwriter and mergers and acquisitions adviser. Mr Moelis, 50, a father of four, then joined UBS and rose to become president of its investment bank before leaving to launch his own operation, drawing an exodus of bankers with him.

In a interview, Mr Moelis said there was no single "fix" for the financial crisis, and agitated for a more sophisticated level of dialogue about an inherently complicated situation. He expressed frustration over competing for talent against banks that have received money from the US government, and predicted that the US economy would lead an eventual global recovery.

How deep do you think this recession will be?

I think it'll be fairly deep, very deep. My view is we're going into a very strong period of deflation. I think the people worried about inflation and hyper-inflation are off market. I understand people are worried about spending $700bn, but that is actually a drop in the inflationary bucket when you're destroying wealth, credit and money at the rate we are.

How do you rate the US government response so far?

I'm not a fan of the stimulus. If you prop prices up, if you prop wages up, if you prop credit up, you're just going to extend the length of what's going to happen. I was a little worried in October because there were rumours that retailers weren't taking credit cards. You can't show up at a restaurant with your own gold bar and slice off little pieces to pay your bill. That would cause difficulty in the economy, so I do believe in maintaining some transfer of payment system that is dependable.

But I don't believe the economy is fixable, just like the weather. We don't send anybody out to fix the weather. We put on a raincoat. In order to have an efficient system you have to be able to fail. If your business model didn't work, if your stock holders allowed that business model, they should lose.

Was it right to let Lehman go bankrupt?

I didn't know there was anybody in charge of not letting Lehman go bankrupt. I thought their shareholders and board of directors would be in charge. If you missed Bear Stearns six months earlier, don't blame me. There were signs. Lehman Bros was a manifestation of a system that was financed improperly as a whole. Lehman accelerated the awareness. I do not believe Lehman was the cause.

So should the government simply say 'we're not intervening in the financial system any more'?

[If it did] I think you'd have a real drop, but we're going to have that drop anyway. The key is to have it quicker and reinvigorate quicker.

I am wholly convinced that this is going to be difficult, but the country that comes out of it the strongest is going to be the US because we will let the free market work as much as anybody will. I don't know why everybody is so anxious to discredit the free market. There's no better system. That also means you're free to be wrong. Will we find a Bernie Madoff? Absolutely. But does that make the whole system bad? No.

What do you think is the distinguishing quality of those people who got it right?

Luck. Whenever a crisis hits, somebody gets it right, somebody gets it wrong. If you're right twice you become the king of something, or the oracle. We make up a title and we carry you around.

How is this crisis going to reshape Wall Street?

It will break up into capital providers and advisory providers. I think that you'll see Wall Street reform itself back into smaller, more manageable entities. To manage teller networks and credit card receivables in the same context [that] you're advising a CEO on a major transaction - they cannot be managed the same way. I used to say Wal-Mart's a great retailer and Tiffany's is a great retailer and we should hope they never merge.

Do you think the government should impose some restrictions if it gives banks more money?

I don't believe the government should be there in the first place. But if you're going to invest in a business I really believe you have to let those companies then run a business. If you don't pay people and you don't allow them to have meetings, the investments we're making in these companies will end up being problematic. If they're going to be owners they have to learn to act like owners.

Where is the action in your business right now?

If it's not restructuring, it's thinking through your balance sheet. Everybody has an issue. We are thinking about going into the business of risk advisory. There are things out there that make credit default swaps look like plain vanilla ice cream. We think there will be a large advisory business helping people understand the risks they might have obtained indirectly or directly. They might have terminated the whole department that acquired that risk, but they still have the paper.

Some argue the crisis will accelerate America's relative decline in the world. Are they right?

No. If we can maintain the US as a place where you can put money to work and depend on the outcome, we'll actually come out of this ahead of the rest of the world.

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If size is the measure of achievement, then President Barack Obama has outdone every one of his predecessors since Harry Truman. Setting out spending plans for the next decade on Thursday, the administration announced that the US government would run a $1,750bn fiscal deficit this year. Equivalent to 12.3 per cent of gross domestic product, the gap between tax receipts and spending is at its greatest since the second world war.

The ambition inherent in the plans is similarly large – to stimulate the economy out of recession and transform the healthcare system while (and here’s the tricky bit) returning the public finances to a reasonable footing. It is hard to square the last of those, shrinking the fiscal deficit to $533bn by 2013 (then expected to be a mere 3 per cent of GDP), with the rest.

To do so requires the assumption that the economy will return swiftly to 5 per cent nominal growth a year by 2011 and 6 per cent thereafter. Questions about the effectiveness of the current stimulus package aside, the assumption is that such spending will be temporary, with private demand emerging on cue to fill the hole as the economy recovers. The lesson though from Japan’s lost decade is that the economy falters as soon as government support is withdrawn.

Structural changes in the US economy may make this feat even harder. At the peak in 2007, finance contributed fully one-third of domestic corporate profits. Chastened, and soon to be heavily regulated, assumptions for tax revenues based on the recent past are likely to prove optimistic.

It would be remarkable if the gap can be paid for by greater government efficiency and higher taxes purely for the rich. If the president can resurrect the economy and rapidly bring the deficit down at the same time, he may want to try walking on water next.

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