BLANKLEY: Obama's gamble

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By Tony Blankley

OP-ED:

Much of the media are following the convention of assessing President Obama's first 100 days in office. The term was first applied to new American presidents during Franklin Roosevelt's spring of 1933.

But Mr. Obama may wish to note the term 100 days derives from Napoleon's escape from Elba in March 1815, his brilliant reforming of an army, his march through France, and his final defeat by the British and the Prussians at Waterloo. It's up in the air which precedent will apply to Mr. Obama.

After 50 days on the job, the average of his job approval polls according to RealClearPoltics.com is 60.3 percent - almost precisely average for such data for presidents since Richard Nixon. So the polls don't tell us much.

Ronald Reagan's and Bill Clinton's numbers generally went up from this point in their presidencies; Mr. Nixon's and Mr. Carter's went down.

But these polls do not yet reflect the effect on public opinion of his budget announcements. There are two likely effects: one obvious and predictable, the other more delayed and more subtle.

The first is that those who are to be more highly taxed begin to know who they are. By proposing limiting charitable donations and mortgage interest deductions - along with higher marginal and capital gains rates - for the upper middle class (and in effect most of small business), he not only threatens already hard-pressed charities and churches but pulls another support out from under real estate valuations.

By going straight at the nation's investors with tax increases, he risks undermining already flagging investor confidence. All this Mr. Obama presumably already knew was the political and economic price for getting his hands on more taxpayer dollars to spend.

But vastly more dangerous to the Obama presidency (and the nation) was his decision to go full steam ahead to immediately start to transform health care, fight carbon dioxide energy sources with new taxations that will increase the cost of all energy, goods and services, and increase new expensive education entitlements as part of federalizing American education.

It is this decision to not postpone those multiyear, multitrillion-dollar programs until the economy and the financial system is revived that exposes Mr. Obama's presidency to a possible catastrophic meltdown in its first term.

Not only is Mr. Obama failing to focus more or less exclusively on protecting the financial system and the economy that depends on it. He is letting his ideological ardor drive him to expend both his own and his administration's attention, along with the vast new tax dollars, on those programs, rather than on the financial and economic crises.

Thus, and here is his political danger: If the financial system fails (and much of the economy along with it), it will be a fair, true and politically lethal charge against Mr. Obama that he didn't do all he could as soon as he could to protect us from the catastrophe. It was this decision that shocked even some of his moderate supporters such as David Gergen, David Brooks and others who are muttering in private.

And this misjudgment is only compounded by the slow and inept start of Treasury Secretary Timothy Geithner, the man with the line responsibility to fix it, and who only this last weekend got around to nominating some his vital sub-Cabinet officials. The failure of both Mr. Obama and Mr. Geithner, in the five months since the election, to come up with a plan to deal with the toxic assets and insolvency of major financial institutions may well look even more irresponsible if the derivatives crises in fact hit the world.

The great whispered-about possible crisis that causes shudders among financiers and governments around the world is what to do about the more than quadrillion (1 thousand trillion) dollar notional value of the world's derivatives (what Warren Buffet called the financial WMD, weapon of mass destruction) - if that notional number becomes crystallized, and thus real.

By comparison, the U.S gross domestic product (GDP) is $14 trillion; U.S. money supply is $15 trillion. The GDP of the entire world is $50 trillion, the real estate of the entire world is $75 trillion, the world stock and bond markets are worth about $100 trillion.

The notional $1.14 thousand trillion (as reported by the Bank of International Settlements in Switzerland) only becomes real (and frightfully dangerous) if either counterparty to the derivative goes bankrupt - and if the defaulter is a major institution. Then it would start a cascade of cross-defaults that might well infect and bring down the world financial system.

It may well be that the U.S. government has put up $180 billion to sustain the solvency of AIG because of its derivatives holdings. Our government may well need to spend trillions more before this is over on other tainted institutions and hope that is enough to hold off the derivatives catastrophe.

By trying to fix the financial system and the economy inattentively and with one hand tied behind his back (as he fritters away both attention and trillions on new health care and education entitlements and carbon use), Mr. Obama is betting so much more than his presidency. His willingness to take that risk is the chilling lesson of the first 50 days. Taking that risk itself is the political equivalent of a dangerously leveraged derivative.

Tony Blankley is the author of “American Grit: What It Will Take To Survive and Win in the 21st Century” and vice president of the Edelman public-relations firm in Washington.