The Administration's Six-Month Checkup

We're coming up on the sixth-month anniversary of the Obama administration. The economy it inherited was a real mess. Things have gotten better to the extent that they aren't falling apart as quickly. But Obama's problem is that he was elected as a man of destiny who could quickly and effectively change the world. "Change" was his mandate. An eighth of his term is up, and what has really changed?

I'm going to argue that at least one really important thing has already changed, and changed for the better. And while I oppose the Obama administration in almost every sense, I'm willing to give credit where credit is due. Whatever else you may say about the economy, the Obama administration really has ended the banking crisis.

At the same time, I'm going to argue that the administration — and the Democratic-controlled Congress — has done just about everything wrong. Other than in the realm of banking, the only good thing I can say for them is that they've done so little. The risk is that in the future they will do more.

For investors, the conclusion is somewhat ambiguous. On the plus side, the economic backdrop has improved enormously with the conclusion of the banking crisis. On this basis alone, I believe that the recession and the bear market are over.

The problem is that everything else the administration has done will make the recovery slow and weak. So while the stock market probably doesn't have any serious downside at this point, it probably doesn't have any serious upside either.

So the art of investing for the next several years will probably consist of market timing — picking the tops and bottoms in a narrow and volatile trading range. Long-term investing may be obsolete.

Let's dig deeper into these ideas. First the kudos for the Obama administration for the way it has handled the banking crisis.

The first good thing Obama did was picking Tim Geithner to be Treasury secretary. Remember, I hailed his nomination when it was first made last November, citing his on-the-job training in bank crisis management.

That training paid off. Geithner found an ingenious way to save the banking system without spending a penny of the taxpayer's money.

Shortly after taking office in February, Geithner announced that the top U.S. banks would be subjected to a "stress test" to determine their health and solvency. That was smart — it gave the public confidence that, after a year of ad hoc panic whenever an individual bank got in trouble, the regulators were going to look carefully at all of them and once and for all figure out who was strong and who was weak.

What almost nobody appreciated at the time was a critical detail of Geithner's stress test program. He said that any bank that "failed" the test would be able to get a capital injection from the Treasury. But with an important difference from the capital injections that the banks got from the Treasury under Henry Paulson in October. This time, the capital would come in the form of preferred stock that could be converted into common stock. And the conversion price would be the bank's stock price on Feb. 9, the day before Geithner's announcement.

You probably don't see immediately why that detail is so important. I didn't either at first. But I've come to realize that it was absolutely ingenious. By being willing to convert preferred stock to common at a fixed price — the Feb. 9, 2009 price — Geithner was effectively saying that the Treasury would make sure that no bank stock could ever again trade lower than that price. Why would it? How could it? The Treasury stood ready to buy at that price, so who would sell below it?

What better way to support these stocks, which it seemed were all headed for zero? What better way to stop the speculative raids on these companies by short-sellers?

It didn't work at first. Geither was not effective in communicating the importance of his guarantee on stock prices. But a couple months later when the stress tests were completed, and the details became better known, the stocks of the banks soared well above the February 9 price, even though many of them "failed" the stress tests, in the sense that they were forced to raise new capital.

Was that brilliant, or what? Geithner didn't have to put a penny of taxpayer dollars into capital injections. He just offered a guarantee — and it turned out that what the market wanted wasn't capital, but the assurance of such a guarantee.

Now the brickbats. Compare Geithner's triumph to the abject failure of the stimulus bill enacted at about the same time. At some 950 pages, it's a sure thing that not a single senator or congressman who voted for it read it. Yet they voted for it, and spent $787 billion of your money for absolutely nothing.

For stimulus to work at all — and for it to be cost-effective — it has to be targeted at areas of the economy that are especially weak. Now much of the stimulus money was directed at such areas? Approximately none. How much of the stimulus money has even been spent, however unwisely? Approximately none.

But it was introduced by Obama with such fanfare. Hopes were so high (they were audacious, you might even say). And now with the unemployment rate ticking higher every month, the White House had to send Vice President Joe Biden out to admit that they didn't get it right. Listen to Biden painfully repeat himself on one of the political talk shows last week:

"The truth is, we and everyone else misread the economy."

"And so the truth is, there was a misreading of just how bad an economy we inherited."

"The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."

OK, nice to finally know what the "truth" is. I guess that means that all that other stuff they said about the stimulus plan was something other than the truth. Maybe, a lie?

With the stimulus bill such an expensive dud, we should be thankful that the Obama administration and the congress haven't been able to complete anything else on their agenda so far. No mortgage "cramdown." No unionization "card check." No "cap and trade" carbon tax. No health care "reform." No tax hikes for "the rich."

At least not yet. The truth — as Biden would say, or might be forced to say someday — is that all these things are terribly antigrowth, because they take incentives, dynamism and flexibility out of the economy. So far the economy hasn't been saddled with these things — and it's still having one hell of a time recovering. Imagine how hard it would be if some of these things actually came to pass.

They may yet. Cap-and-trade and health-care reform are very much live issues. Higher taxes are constantly being talked about. For investors, these are Swords of Damocles hanging over the stock market.

So I'm not a bear. I say buy the dips. Try to catch the bottom of the trading range. And thanks to the Obama administration for solving the banking crisis, so that the March bottom in stocks will likely hold.

But don't overstay your welcome. Sell the rallies. And blame the Obama administration for having to do that. If it weren't for the multiple threats to growth overhanging the market, you could actually become a long-term buy-and-hold investor again. Maybe someday.