The President as Pollyanna II

One of the worst things that can happen to an administration is for them to see things as rosey while the citizenry suffers. It's sometimes called the Pollyanna effect. Especially when they are talking about the economy, the administration is always in a difficult position. If they sound gloomy, they talk down an economy. Furthermore, economic health is the administration's responsibility. So, if the economy is suffering, who's responsibility is it? Remember how Jimmy Carter addressed the nation and presented a near doomsday scenario. That didn't help him or our nation. Yet, when you proclaim everything just fine while things aren't it could be even worse. Those are the waters that President Obama is dangerously close to treading on right now. Yesterday, the president used his weekly radio address to defend the stimulus and call for more patience.

Now, he's using a Washington Post column to do the same thing.

The swift and aggressive action we took in those first few months has helped pull our financial system and our economy back from the brink. We took steps to restart lending to families and businesses, stabilize our major financial institutions, and help homeowners stay in their homes and pay their mortgages. We also passed the most sweeping economic recovery plan in our nation's history.

The American Recovery and Reinvestment Act was not expected to restore the economy to full health on its own but to provide the boost necessary to stop the free fall. So far, it has done that. It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall. We must let it work the way it's supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.

Now, the president continues to claim that aggressive action has "helped pull our financial system" from the brink. What does this mean besides making sure that banks and financial institutions can continue to function? It certainly doesn't mean that lending has gotten anything but more difficult. CNBC has a good microcosm of just how much more difficult things have gotten since our "financial system was pulled from the brink".

Inna Komarovskaya was ready to do her part to revive the economy: She found a “really cute” condo to buy.

Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one.

“Everyone says this is a buyer’s market, but they wouldn’t let me buy,” said Dr. Komarovskaya, 30. “It’s not fair.”

The rule requiring two years of tax returns was put into place after TARP and the stimulus. Lending on condos has gotten significantly more restrictive. Finally, Fannie/Freddie created all sorts of new credit score break points in January that added to the rate of anyone with a credit score below 740. These are just three examples of dozens of new restrictions put into place since the administration supposedly made things easier to get credit. (like the new appraisal rules created by Fannie/Freddie)

Yet, the president continues to say that we have been pulled back from the brink. The biggest problem from the perspective of the administration is that their defense of the stimulus is vague. It's vague in the face of real and specific maladies. We're at 9.5% unemployment and going higher. We're losing near 500,000 jobs monthly and there' no sign of that loosening. So, how does the president counter these very stark economic problems? He says it will take two years to fix things.

There is a whole other set of problems with the president's new proclamation that the stimulus will take two years to work. First, he demanded immediate passage because we couldn't wait. We needed the stimulus right away. If that's so, why would it take so long to make its way through the economy? Wouldn't it have made more sense to debate a bit more but pass a stimulus that worked quicker? It's certainly an effective line of attack.

More than that, what does the president mean when he says,

It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall.

Does the president mean that the economy will be fixed in two years? If so, he's out of his mind. We've lost just over two and a half million jobs since he took over. We'll lose at least two million more before the end of the year. It's going to be the summer next year at best before we stop losing jobs. That means we might still be at double digit unemployment two years from the implementation of TARP. Does that sound like an effective two year program?

Maybe, the president means that it will take two years to hit bottom. If that's the case, no one is going to consider that a success.

The president has two significant problems. At best, he has an effective program but totally underestimated how serious the situation is and made rosey projections that look foolish now. (remember how our unemployment rate would cross 8% without the stimulus) At worst, he's chosen the wrong approach and will continue to defend it while the economy gets worse and worse. (I would however be more confident it was the first if he could come up with something more than platitudes to defend the policy)

If it's the first, his Democratic colleagues will get crushed in 2010 while he will likely get re elected. If its the second, we can all only hope that things get reversed before it's too late.