The Obama-Geithner Plan Will Work Fine --So Long As The Chinese Do As We Wish

By Deep Wall Street

President Obama met with his august council of outside economic advisors, headed by Paul Volcker, on Wednesday. Thanks to the White House press office, we got our almost daily dose of optimism: POTUS told his advisers that the economy is undergoing a "return to normalcy." No doubt they felt better and went out and bought some bank stocks, just like every mutual fund manager in the country, further fueling the "stress test rally."

Is it all--the economic recovery, that is--really just about confidence? Maybe Treasury Secretary Tim Geithner is on to something. His predecessor, Hank Paulson, who supposedly knew a lot about the markets from his decades at Goldman Sachs, nonetheless had an uncanny tin ear when it came to reassuring the financial world.

That is, Paulson's plan of telling Congress that he needed $700 billion to bail out his Wall Street pals, or the New Great Depression will hit--and then watching cluelessly as Congress voted it down, the first time around--was not a good confidence-building strategy.

Geithner's stress test rally is the opposite. He told everyone "Look here, this is as bad as it can possibly get and everything is still okay."

The only problem with his strategy is that it is completely circular. Everything will be okay if the banks can generate enough new earnings over the next several years to pay for their stupidity of the past decade. But they can only do that if this really is the bottom and the economy starts to recover. And what new miraculous policy tool will make this happen? Reflating the housing bubble. Yes, let's do it all over again. So the Feds are doing everything possible to pump so much money into mortgage lending at such low rates that it will be certain to drive up home prices and make consumers start spending money they don't have once again.

Pretty crafty. Maybe. But will the Chinese be willing to loan us the money to do this a second time? Stay tuned.