Meredith Whitney: The government is “out of bullets”

By Edward Harrison of Credit Writedowns

I am not sure I buy Meredith Whitney’s assertion that the government is “out of bullets” in its quest to prop up the economy. It’s a matter of political will more than anything else. Nevertheless, I do agree with her basic premise in the CNBC video below that the financial sector is likely to see a more unfavourable economic climate in 2010 than it has done in 2009.

In particular, a looming crisis at the state and local government level, coupled with continued distress at regional and local banks will mean a deadly combination of higher taxes, fewer jobs and less credit for households and small businesses. Unless we see a change in the political climate in Washington, now oriented toward deficit reduction over jobs, we are likely to see a double-dip recession late in 2010 or 2011.

Whitney says “the component parts don’t add up” in addressing the Obama Administration’s conflicting rhetoric on jobs, stimulus and deficit reduction.

What’s so frustrating is you have an administration that is arguing such a populist [rhetoric] and not appreciating all the unintended consequences that the consumer and small businesses have far less credit.

I have said Barack Obama gets it because we have confirmation that he understands that raising taxes or cutting spending is what leads to a double dip recession.

I will accept that not everyone believes we should avoid recession if it means more government spending because of the enormous debt loads in the private sector and the unfunded liabilities in the public sector. Fair enough. I have my own doubts due to concerns about crony capitalism. That is an ideological debate about the role of government.

But in executing actual policy, I believe the President’s words and actions are at odds in part due to the political landscape and the wishes of the corporate interests to which he is beholden.

Witness the duelling headlines today where Joe Klein points out a speech with elbows that the President delivered today.  Michael Tomasky was equally impressed. But, this was just a speech. When it comes to actual policy, Robert Reich was less impressed.

Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn’t want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn’t look like more stimulus because it’s not really adding to the deficit. It’s coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now — an economy fundamentally out of balance — we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can’t run deficits so they’re wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That’s a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama’s "new" stimulus, announced today, is about all we have, and it’s not nearly enough.

I am hearing a figure of $70 billion for a jobs initiative – a pathetically small number in an economy of nearly $15 trillion.  In my view, it is better to do nothing than to do something insignificant that acts to discredit your policies.

Returning to the bank world, Whitney’s recent bearishness has been on target (and one CNBC presenter mentions Goldman Sachs as an example). When asked pointedly whether she was making a general market call, Whitney says no. But she does rightly point out that distress in financials does have a spillover effect on the wider economy via restricted credit and this cannot be positive for shares.

As for TARP, Whitney makes an important point when she says the TARP repayments can be seen more as political calculation than an affirmation of banking sector health.  She believes the government needs the TARP funds to help states in severe budgetary distress because no funding will be forthcoming via legislative approval.

I see this as a textbook Larry Summers play and a continuation of the executive branch’s end-run around Congress to affect fiscal policy. In March I wrote:

The political realities of solving a financial crisis have often meant circumventing legislative approval to meet the exigencies of a particular situation. This was certainly the case in 1995 during the so-called Tequila Crisis in Mexico. And I believe it is the case again today in 2009.

Read that post to see how the Clinton Administration was able to bail out Mexico without legislative approval.  They are clearly seeking to exercise the same tactics in this case again.

The fact that this post has been all about government when I intended to write something about financial services should tell you something is seriously wrong.

The video of Whitney is below. It runs eight minutes.

As for Whitney’s comments on people without access to credit, see also Millions in US lack bank access from the Financial Times.

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This entry was posted in Banking industry, Economic fundamentals, Guest Post, Investment outlook, Macroeconomic policy, Politics on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Dippy

    Out of bullets or out of gimmicks[?] me thinks gimmicks. Let that percolate down through the gray matter, were moving forward with parlor tricks and illusionist slight of mind sophistry…life jackets anyone?

    And ya gotta love it when some one of Meridith’s gravitas, forlorn look upon her face, utters “I hope I’m wrong”…fasten your galactic seat belts please and observe Vinny’s rules to survival.

  2. Blurtman

    Of course unemployment is the huge elephant in the room, and threatens a FIRE industry focused administration. Sonner or later, Obama will have to achieve either through policy or luck, an improvement of the economic status of Main Street. If not, the door opens wider for third party candidates.

  3. Ronald

    Meredith makes it clear that credit contraction is real for a significant portion of the economy combined with the FED
    lowering its participation rate will sober up the media and the stock market or to put it another way the new age economy is bust.

  4. Edward Harrison Post author

    Two caveats here:

    1. The contraction in credit to date has been more a result of the decline in nominal GDP than it has been the result of deleveraging (lower debt as a percentage of GDP/income). People cannot and will not deleverage until forced to do so.

    2. The credit contraction is concentrated in small businesses and households. Large businesses are more flush with cash.

    Of course, if your bias is the TBTF banks, then you are going to miss this.

  5. mannfm11

    What double dip? There is more bull about double dip when in fact there hasn’t been a recovery. There has been more accounting fraud. More government is a recipe for this lasting 20 years or more and we have the worst person running things for there to be a government financed solution.

    The next nonsense is the consumer is any percent of the GDP. If buying is what constitutes production or product, what the hell is being produced? A better idea is supposed to be that the result of US GDP is 70% consumer spending. But, that isn’t the result of US GDP, but the result of excessive credit. No one wants to talk about the real problem, debt that cannot be repaid without slowing the economy or contracting assets and money supply. The financials are out of capital and the only way they can raise capital other than have the government divert it to them is to draw it out of the money supply. The great paradox there is that the source of initial credit is bank capital, but then bank capital rests on the surety that the credit can be paid back. If another person pledges his bank credits to bank capital, the system is deprived of the money needed to repay debt owed banks. This one is going to be even worse, as banks are going to lose money speculating, which will exist as a liability and a deduction from bank capital. The next bear move in the stock market is going to disembowel the system.

  6. Michael

    I said it before, and I am going to say it again: What we need in this country is vigorous economic growth. If other countries can grow at 10% a year, so can we! It is all a matter of putting in place the right policies and tax incentives.

    This is the only way out of this mess that we are in. Strong growth reduces unemployment. This is a prerequisite for homeowners to have a paycheck to pay the mortgage, so that real estate stabilizes and the banking crisis abates.

    It will also increase company profits and help the stock market move higher to help people’s retirement plans catch up. Why don’t we do it? Wish I knew. All the focus has been on irrelevant issues and not on this important one. Hopefully it will be addressed soon.

    By the way, with all the volatility in the stock market, it is important to know when to get in and when to get out. Timing signals can help an investor enhance their investment returns.


    Its daily DJIA index trading signal is up a respectable 77% for the year (as of December 2, 2009) and it is free of charge for individual investors.

  7. Doug Terpstra

    There’s a stark disconnect between Obama’s talk and walk. His soaring rhetoric has elbows but his actions are timid, tentative and prostrate, all political triangulation and wind-testing. What ever happened to the bold persistent experimentation of FDR in a crisis, the (disabled) man who welcomed the hatred of the banksters? Obama needs to pick himself up off the court and start throwing elbows dammit.

  8. Hugh

    There is a difference between being out of bullets and firing blanks. What we are seeing is not a President without options but one who has no interest in entertaining any. Obama is failing to lead, not because his leadership is constrained but because what we are seeing from him is what he wants.

    I have written before we are looking at a three phased event.

    2009 the stock market bubble
    2010 flux
    2011 depression

    With likely disappointing Christmas sales, it is hard to see where the stock market has any room to go but down in the new year. I have the feeling that the only reason the market has stayed up this long is for management to lock in their bonuses for the year.

    2010 is an election year so there probably will be some aid for states pushed through for states, less for municipalities. It will not be sufficient for the needs of either but enough to get the economy through the election.

    In 2011, I see only depression. We are sinking faster than our elites are bothering to bail out, not the banks, but us. The crash has been going on for 2 years now and look at what they have done. They have either not acted or acted with great stupidity and waste. They have not shown a scintilla of learning during the whole process. There is no reason to think they will think or act better in the future. I would dearly like to be wrong about this, but, unless there is a radical improvement in our political leadership and governance, the chances for which are near zero, I think this is a simple call to make.

    1. mannfm11

      You are giving the government too much credit Hugh. The economy was needing $5 trillion to run before this stuff hit the fan. Much of the money coming out of government is not real money, but a drop in revenues. I am not too sure I don’t pretty much agree with your diagnosis though. 2010 corresponds with 1931 in the last depression and that was when counries started pulling their money from other countries. I believe it was Yves who posted the stuff on China from pivotcapital.

      Michael above mentiones 10% GDP growth. I doubt China is growing at 10% by building surplus capacity any more the Dubai was and any more than the US grows by the consumer spending 70% of GDP. The expansion of credit in the USA is confused with GDP growth because contrary to FDR destroying the bankers, he empowered them to expand credit until all but a few were broke. FDR and Woodrow Wilson put this corporate/fascism system on us and few understand the wealth the US had rolling before they pulled this stuff.

      Even if we could grow 10% annually, where would we get the resources? The entire game is a credit game and the credit needs to be liquidated for it to start again.

  9. Fed Up

    “I will accept that not everyone believes we should avoid recession if it means more government spending because of the enormous debt loads in the private sector and the unfunded liabilities in the public sector. Fair enough. I have my own doubts due to concerns about crony capitalism. That is an ideological debate about the role of government.”

    I believe you need to break down private sector into the rich and the lower and middle class. Is it more like when the lower and middle class stopped going into debt to the rich (both domestic and foreign), did the rich get their gov’ts to go into debt for them (the lower and middle class)?

    1. David

      Wow, a sharp comment! With all the government going into debt, I don’t see the debts of the middle and lower classes getting paid down to an adequate degree.

    2. Anonymous Jones

      I believe this is exactly right. The past two years has been about using the government to ratify “gains” of the elites that were mostly illusory. They were “gains” that only could be used if the lower and middle classes could pay off their debts, which they couldn’t; so the government stepped in and guaranteed a lot of these debts so that the elites wouldn’t feel like they lost any money, while at the same time dooming the non-elites to relative consuming power a mere fraction of the elites. It is done and over with, by the way. When someone outnumbers the average person on a wealth basis 1000 to 1, it’s over. You can’t compete. You can’t use take back the government. You are screwed. That’s what happened. And it would take generations to undo, which probably won’t happen by any other means than a massive catastrophe.

  10. David

    Obama gave a speech with with elbows? Baloney. Obama gave a speech where he blamed the financial crisis on too much government spending and too little taxation. Those things had nothing to do with the financial crisis!!

    He’s looking for an excuse to tighten it seems to me. He’s going to use some nonsense logic to get people all confused and arguing irrelevant points, while he raises taxes and gives the banks some more money.

    I hope I’m wrong. We’ll see won’t we? Prove me wrong Barack!

    1. Anon

      I would call Obama/Summers/Geithner idiot savants, but given the adherence to the Bush/Paulson policies, it makes more sense to drop the savant.

      Modifications to Taibbi in parens:

      “The bad news is our failed health care system (financial system) won’t get fixed, because it exists entirely within the confines of yet another failed system: the political entity known as the United States of America.”

  11. Dave Raithel

    It may be a Larry Summers play, but then he might be some kind of idiot savant, I don’t know – and I’m not here to defend him – from all I’ve read about him, I doubt we’d get along, and I do rather enjoy throwing the first punch once everyone knows somebody has to. But The Columbia Daily Tribune reports today that Missouri expects a drop of perhaps $1 Billion in revenues through 2009 – though nobody knows. The State budget is about $23 billion, including all the Fed money (e.g. Medicaid) that’s spent. So a drop of $1 bill in-house, so to speak, is not insignificant.

    But how fortuitous that those who would repay their TARP money, to escape the executive compensation limits, would benefit the political needs of the Administration …?

    I don’t know about that, either….

    But I have appreciated Mr. Harrison’s early on complaint that Obama needed to act more like a son of a bitch, which he still is not. Reich’s “tight rope” analogy is a too polite way of calling someone a fence-sitter. Throwing elbows, without naming targets, is flailing. So much hope, so much disappointment.

  12. aet

    “Out of bullets”?

    With all that Department of War spending over the years, I should have thought that Washington would be flush with bullets.

  13. joebek

    Can anyone explain why states cannot run deficits. Everyone repeats this as though it were a natural law. Seems to me that the ability of a state to run a deficit is dependent solely upon the willingness of someone to fund it. It hardly seems likely that the states with the largest deficits could not find creditors.

  14. Bill

    What’s really disgusting about the CNBS snippet, is that she is virtually harassed (by peabrain Kernan FGS) for actually thinking expertly about the whole market, based on what she calls her “knitting” — i.e. the banking sector.

    Talk about people who “can’t handle the truth”………the whole CNBS staff falls into that category….but they certainly recognize it when they hear it, thus their efforts to distort or suppress it.

  15. Dave

    There is no Federal law about State deficits. States can be allowed to run deficits if their State Constitution allow for it. 40 out of 50 do not allow for deficits, primarily out of fiscal common sense,

    So far only Vermont has the ability to run deficits.

    1. joebek

      If States cannot run deficits only because they choose not to run deficits, i.e. their individual constitutions disallow it, maybe they should be refused any federal assistance. The credit markets, after all, possibly render a truer judgment of a state’s fiscal situation than the congress or treasury department.

  16. bass

    Meredith Whitney is the Sarah Palin of the financial industry. Major success on the back of pure nonsense. She puts words, phrases and sentences together so you think she is smart. But, she is a bumbling fool. Why do we care what she says. My prediction: She’ll be a complete flameout. There is NOTHING behind that fake blond hair.

    1. Bill

      Don’t you remember ? the Bazooka was in Hanky’s pants…….er pocket, and I think he took it with him.

      1. MyLessThanPrimeBeef

        Darn, he didn’t hand it down to his younger brother, Tim?

        That’s the problem with this country today. I used to walk 50 miles in the desert to go to school…at least I think I did.

  17. Gerben Bakker

    Pratt & Whitney :-P

    She is right! Got the same conclusions from my own independent research… Long term earnings growth dropped to 1,5%!!!! We’re facing a stockmarket bubble guys.

  18. Robert Browne

    She has done more macro analysis than any of the others, she has been unerringly correct in her assessments and lucky for us she is willing to share with the general public. Any investor that wants to suspend his critical faculties and ignore what she is saying is being deliberate stupid. It would not matter if the hairs on her head were black wires she is saying what she says based on exceedingly sound analysis. You will never hear Geithner, Summers or Brnanke tempering their strident remarks with humility. Why? They know it all, sure is that not obvious at this stage! Yet, they are the very guys who caused all this mess in the first place.

    Listen to this woman and prepare for what is ahead. This is the greatest contraction of consumer credit since the great depression and it will continue in 2010 and beyond. Sure interest rates are zero and that is having a bubble effect on stocks but the fun will really start when these investments have to be unwound which will bring crash number two with the FED absolutely helpless to do anything. They will not just be out of bullets they will be out of paper for printing but ideas they are trying to spend their way out of a recession and it will lead to the dollar being replaced as the reserve currency which will spell disaster.

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