Economy

As Published in the Washington Post on August 17, 2012:

Two respected economic advisers to the Romney campaign launched a new line of criticism of President Obama’s economic stewardship on this page this week [“Obama’s faulty math; his economic arguments contradict themselves,” op-ed, Aug. 16]. The case offered by Kevin Hassett of the American Enterprise Institute and Glenn Hubbard of Columbia Business School contained three bold claims.

Two of the three are demonstrably wrong as matters of economics, and the other is off-point.

First, Hassett and Hubbard say that the president has misled the country in claiming that economies that suffer financial crises typically recover only very slowly. Second, they insist that Obama himself didn’t expect a slow recovery, judging by his administration’s initial forecast. And they say that if Obama did expect a slow recovery, he should have known that Keynesian stimulus wouldn’t work under that circumstance.

If this brief were true, it could suggest that the president was befuddled in his early months in office, then lied to promote his stimulus package and now is lying again. But this brief is simply wrong, and as good economists, they should know it.

To refute Obama’s claim about the slow recovery — as well as a recent, landmark study documenting hundreds of disappointing recoveries following financial crises around the world — Hassett and Hubbard cite a less well-known study from the Cleveland Federal Reserve Bank. That study, by Michael Bordo and Joseph Haubrich, found that financial crises in the United States often have been followed by strong recoveries. But the main evidence comes from the long series of financial busts from 1880 to the 1920s. In fact, Bordo and Haubrich note that the three major U.S. financial crises since the 1920s — 1932-33, 1990-91 and 2007-08 — were all followed by notably slow recoveries. Moreover, as Ezra Klein reported in The Post this month, Bordo believes that the slow pace of the current recovery reflects not the president’s policies but the fact that it follows a meltdown in both finance and housing.

The Romney campaign’s notion that the 2007-08 financial crisis should have been followed by a rapid, strong recovery — and, by implication, would have been but for Obama’s policies — ignores other well-known economic evidence. The data show, for example, that the current recovery is comparable to the one that followed the 2001 recession, when Hubbard chaired George W. Bush’s Council of Economic Advisers. In the three years following the end of the 2001 recession, which did not involve a financial crisis, real gross domestic product grew only modestly faster than it did in the past three years. Moreover, in the 37 months since the end of the 2007-09 recession, U.S. businesses created nearly 3.9 million new jobs. Recall that fewer than 1.1 million were created in the first 37 months after the 2001 downturn.

The Romney advisers then criticized the Obama administration for its first economic forecast. Yes, the administration initially predicted a stronger recovery than has occurred. In part that was because administration officials, along with everyone else, underestimated the depths of the precipice the economy had fallen into. The Bush administration made much the same mistake, with much more dire consequences. The Bush team ignored all signs of an impending meltdown and then stood by as Lehman Brothers collapsed, taking AIG, Merrill Lynch and others down as well.

Finally, the Romney advisers claim that if Obama had expected a slow recovery, he should have known that stimulus would produce only a temporary lift, to be followed by a comparable decline. There is an economic theory called “rational expectations”; it holds that stimulus never works. Almost all economists dismiss it because the overwhelming consensus is that stimulus often does work. In any case, there is no theory or evidence to support the peculiar claim that the expectation of a slow recovery will disarm Keynesian stimulus. In fact, within two months of Congress passing Obama’s stimulus, our sickening slide toward a depression halted, and growth and job creation resumed — albeit at the moderate pace characteristic of recoveries following a financial and broader economic crisis.

Yes, growth has slowed periodically since then, but not to anything like the degree the Romney advisers claim. According to their notion, we should be in a deep recession today. In any case, the president asked repeatedly for additional measures to bolster the recovery, which Republicans in the House of Representatives have repeatedly rejected.

Beyond the partisan cherry-picking of economic evidence, the question remains: Could Obama have done anything else to drive a more robust recovery? The history of economic meltdowns suggests that a strong recovery is possible only if you directly address the underlying causes of the crisis. In our case, that meant not only stabilizing the financial markets, which we did, but also taking decisive steps to stabilize housing prices by reducing home foreclosures.

Now, imagine the political firestorm if the president had tried to force banks to refinance the mortgages of homeowners in danger of losing their houses or offered short-term loans to help them meet their mortgage payments until the economy recovered. The president’s opponents can hardly blame him now for not taking steps that they would have blocked in any case.

The Obama campaign’s newest ad, “Worried,” calls attention to the two candidates’ different approaches to reducing the deficit. 

The ad points out that Romney wants to reduce the tax burden on the wealthy even further and grow defense spending, which would, the ad alleges, add to the deficit. Obama’s plan, on the other hand, raises revenue by asking millionaires to pay more taxes and makes hard decisions about cuts to both defense and nondefense spending. 

Throughout the campaign, the candidates have offered starkly different economic philosophies. President Obama’s, with its emphasis on public investments, appealed to voters in 2008 who wanted to see the government help lay the foundations for a competitive American economy in the 21st century. Mr. Romney, on the other hand, envisions an economy in which the government’s role is extremely constrained, limited to providing entitlements and defending the country from foreign enemies. 

Both camps argue that their plan will reduce deficits. But independent studies have shown that Romney’s budget plan would actually grow deficits and public debt. Offered a choice between a candidate who reduces deficits and debt while making prudent public investments to grow the middle class and one whose policies overwhelmingly favor the wealthy, voters will make the same decision they made in 2008. 

Once again, the Eurozone debt crisis threatens to suck the oxygen out of the global economy.  Two years of austerity across most of Europe continues to produce the predicted effects:  We learned this week that Europe’s private sector keeps on contracting.  Moreover, global investors began to bail again on Spain, driving interest rates on 10-year Spanish government bonds to an unsustainable 7.6 percent.  Greek, Portuguese and Irish public finance faced comparable rates, so they have to rely on bailouts.  Yet, there isn’t nearly enough money in those bailout facilities to rescue Spain, too.  That’s why this week, Moody’s downgraded its outlook for the region’s strongest economies, Germany and the Netherlands.   If anything, that move was cautious.  If Spain spirals into default, it would likely trigger a continent-wide banking crisis, followed in all likelihood by a real Depression.  It also could upend our own economy on the eve of the election.  

It’s a crisis with lots of nubs.  For one, Spain is in the middle of the world’s sharpest housing contraction and a recession currently forecast to last into 2014.  That what happens when austerity dramatically slows public spending while the nation’s private banks are writing down tens of billions of Euros in mortgage loans gone south.  The result is that government revenues have been falling faster than government spending, piling up more debt – and now several of the country’s provincial governments say they also cannot keep on going without major support from Madrid. 

That is why foreign investors see a growing risk that, sometime soon, Spain’s government won’t have the money to service its fast-rising debts.  The 7.6 percent interest rate on new Spanish debt is the market’s current demand to offset that risk.  But unless Brussels and Berlin step in with new, credible assurances for those holding Spanish bonds, the interest rate will keep on rising until everyone begins to dump the bonds.  Madrid would have to try to borrow even more money, and if it cannot, a sovereign debt default would quickly follow.

Eurozone leaders have tried to head off all of this, but only through a series of indirect and inadequate measures.  The immediate threat from a major sovereign debt default is the collapse of dozens of large banks with large holdings of those sovereign bonds.  German and French banks, for example, hold $600 billion in Spanish bonds.  The Eurozone could have followed the basic rule of monetary unions, and used the European Central Bank (ECB) to guarantee those bonds in some way.  That’s what the Federal Reserve has done for a century here (and the Treasury did it for 50 years before the Fed was created).  Yes, it would be harder for the Eurozone to pull that off, since it has no single national government.   But it does have a single central bank. 

Yet, Angela Merkel has consistently vetoed that course, preferring instead to build a new political and economic environment that could head off future defaults.  So, while Greece and Spain slowly sink, with Italy not far behind, Merkel pursues continent-wide banking regulation to discourage future bank runs from one Euro country to another.  She also is pushing for continent-wide fiscal arrangements to head off the large deficit spending down the road that can cripple an unproductive economy when bad times strike.  For the current crisis, she has agreed to spend €100 billion from the Eurozone to pay the bills of Greece’s government this year.  She also has allocated another €100 billion to bail out the balance sheets of Spanish banks.  And she has allowed banks in Germany, France, Italy and elsewhere to use their Spanish and Italian bonds as collateral from hundreds of billions of Euros in low-cost loans from the ECB.  

This week, the markets rendered their latest judgment on those steps.  The sky-high interest rates now in Greece, Spain, and looming in Italy tell us that all of Mrs. Merkel’s handiwork will not be enough to head off a sovereign debt default.  The results could be disastrous for many major European banks and the Eurozone economies.  How bad could it be?  Even before facing final default, Greece has seen its GDP shrink by 25 percent, its average wage fall by nearly 20 percent, unemployment rise past 20 percent, and government pensions cut back 30 percent.

One final word.  On this side of the Atlantic, the political season has made every development fodder for campaign attacks.  So, we can count on the President’s opponents charging that America under his leadership is following the path of Spain and Greece.  That is nonsense.  The Eurozone faces a crisis of confidence about the capacity of its less productive economies, burdened by deep recessions and large debt overhangs, to honor their future debts.  The irreducible proof is the rising risk premium on new Greek, Spanish and Italian bonds.  There is not the slightest hint of such doubts about the United States.  The interest rate on 10-year U.S. Treasury bonds is 1.75 percent, less than one-fourth Spain’s level, and actual yields are even lower.  And while Europe is deep into a double-dip recession with fast-rising unemployment, we have had more than three years of slow but steady growth and job creation.  

To be sure, a European banking crisis triggered by a sovereign debt default, one which spread from Spain to Italy and then across the continent, would almost certainly end our own expansion.  American exports to Europe – our largest foreign market -- would fall sharply.  American banks would be hit by losses on thousands of investments and other deals that involve European banks which such a crisis will take down.  So, in the end, our presidential election could turn on events entirely beyond the influence or control of either President Obama or former Governor Romney.  Not even their legions of consultants and operatives, and the stream of billionaires funding the campaign’s television wars, will be able to override the economic consequences here at home of either a full-blown Eurozone meltdown or, for that matter, the successful resolution of the crisis.

Romney’s campaign complains that the recent focus on their candidate’s experience at Bain Capital and his unwillingness to release tax returns is a distraction from the real issue: the economy. The campaign, however, refuses to offer any specifics on how to get the economy moving again. Although Romney has claimed that he will grow the economy by balancing the budget and reducing the debt, neither he nor his spokespeople can provide any specifics on how he will actually achieve this.

In an interview with Luke Russert earlier today, Romney spokeswoman Tara Wall addressed Russert’s requests for specific economic policy solutions. Russert cited analysis from independent groups that have shown Romney’s plan would actually add $2 trillion to the debt. 

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Ms. Wall’s responses – aside from being horribly inarticulate – demonstrate two things: 1) Romney, despite the events of the last two weeks, is still unwilling to inject policy into his campaign and 2) the Romney campaign has no coherent answer when their economic plan is actually held up to scrutiny.

On the second point, independent analysis has consistently shown that the Romney plan will add money to the deficit. It is nearly impossible to reduce deficits without raising revenue. Not only will Romney cut taxes, according to Wall, but he will repeal Obamacare and increase defense spending. The CBO has scored Obamacare as a cost-saving policy in the long run.

The fact is, Mitt Romney is espousing discredited supply-side economics disguised as deficit hawkishness. Romney’s policies will disproportionately benefit the wealthy, and, if he is actually serious about making up for lost revenue by eliminating tax preferences, will result in a net tax increase on middle class Americans. The American public needs to know this.

The president has made his economic case clear with specific policy proposals – he will raise revenue, reduce health care costs, and make prudent investments in our economic future. Romney continues to try to make this election about the economy. But without providing any specific policies of his own and by sending uninformed, inarticulate people on air, how can he expect to win this argument?

With its recent ad, “Two Plans,” the Obama campaign offers voters a stark contrast between the two candidates’ tax policies.

According to the ad, Governor Romney’s plan cuts taxes on millionaires by 25%, continues to give tax breaks to oil companies and corporations that ship jobs overseas, and could result in a tax hike for 18 million working families.

The Obama plan, on the other hand, asks the wealthy to pay more taxes so that the middle class can pay less and eliminates tax breaks for companies that outsource American jobs.

These two plans represent a fundamental difference in Romney and Obama’s philosophies. Romney’s depends on “trickle down” economics, believing that growth occurs from the bottom down. Obama’s sees the middle class as the driver of growth, and holds that the economy grows from the middle out. Both philosophies have been tested. In the 1990s, Clinton raised taxes on wealthy Americans and, in addition to a budget surplus, our country saw its highest growth rates in history. George W. Bush then cut taxes across the board, slowing growth and expanding deficits and debt.

The distinction is clear. One plan favors the wealthy and does not incentivize the creation of jobs at home. The other favors normal Americans and tries to bring jobs back to the US. This ad is particularly salient amidst recent reports that, while at Bain Capital, Romney invested millions in a Chinese manufacturing firm that profited from US outsourcing. Moreover, it has recently come to light that Governor Romney holds substantial assets in overseas banks in Switzerland, Bermuda, and the Cayman Islands. When confronted with questions about his investment record and personal finances, Romney has chosen to reveal very little, causing some to infer that he has something to hide. The question becomes: Do we want a leader with private sector experience destroying American jobs and a personal interest in keeping tax rates on the wealthy low, or one with a plan to create jobs at home?

If our financial policies were based on recent experience, the debate over government regulation versus self-regulation by Wall Street would be settled.  Yet, the refrain that “the big banks know best” remains the default position of most American conservatives and many policymakers.   This childlike faith will be tested by the new scandal swirling around some of the most basic interest rates in the global economy, the LIBOR or “London Inter Bank Offered Rates.”  This past week, Barclays Bank admitted that it secretly manipulated LIBOR rates for years, all to pad its own bottom line.  And Barclays is not some lone, bad apple.  Investigators here and in London, Brussels and Tokyo are hard at work looking into reports of similar manipulation by other big players, including Citigroup, Deutsche Bank and J.P. Morgan Chase.  This could turn into the largest consumer fraud ever seen.

It will take months for the general public to catch on to what this latest scandal is about.  It starts with one basic fact: LIBOR interest rates are not set by the supply and demand for credit, like many other rates.  Instead, every morning, representatives of the 18 largest Western banks report on what they would be willing to pay to borrow funds from each other (“Inter Bank”) in the future.  Under LIBOR rules, the four highest and four lowest estimates are eliminated, and the average of the rest becomes the official rate.  For example, in 2007, the LIBOR rate to borrow three months in the future, in dollars, averaged 5 to 5.5 percent.  

LIBOR rates are a very big deal, because they are benchmarks for countless other interest rates.   The majority of adjustable rate mortgages, for example, are set at a LIBOR rate plus 2 or 3 percentage points.  So are millions of student loans, auto loans, and credit card finance charges.   LIBOR rates also are used to set or reset small business loans, futures contracts, and interest rate swaps.  All told, an astonishing $360 trillion in loans around the world are indexed to LIBOR.   That is more than five times the value of the world’s entire GDP this year. 

One reason that LIBOR has such a far reach is that there are numerous LIBOR rates for different purposes.  Each rate has a time frame – rates for loans one day from now; one month, three months and six months out; one year, five years and ten years from now, and so on.  There are 15 such time frames, all told.  In addition, separate LIBOR rates also are provided for dollars, Euros, yen, and seven other currencies.  The integrity of these LIBOR rates, however, depends entirely on the honesty of banks reporting the rates they actually would be willing to pay.  Inevitably, we got what we should have expected. 

So, when Barclays (and almost certainly others as well) had investments that paid off, or simply paid off more, when interest rates rose, it simply reported a higher figure to LIBOR in order to nudge up the average.  And that usually led to higher interest rates for millions of other businesses and people with loans indexed to the LIBOR.  Sometimes, it worked the other way.  In late 2008, Barclays (and probably others) low-balled the rates they reported for LIBOR averaging.  The purpose was to make themselves look more sound than they actually were, since they would be willing to borrow only at low rates.  They presumably figured that might reassure their shareholders and perhaps even dampen public demands for tighter regulation.  

For several years, academics and a number of market followers warned that something funny was going on with LIBOR.   The evidence was not hard to find   For example, the “spread” or difference between U.S. Treasury rates and LIBOR rates for loans of the same time frame began to widen.  From 2000 to 2006, LIBOR rates averaged one-quarter of one percentage point above Treasury rates, and the two rates moved up and down together in lock step.  In 2007, however, that spread more than doubled to nearly two-thirds of a percentage point, and their movements up and down did not track each other so closely.  By 2008, the difference in the rates was five times what it was in 2000-2006, averaging 1.3 percentage points, and the up-and-down movements of the two rates no longer tracked each other.

All of the obvious parties that might have done something about it – the Fed and the SEC, for example, or the Financial Services Authority in Britain – apparently looked the other way.  This tolerance for sub rosa interest rate manipulation has cost millions of ordinary Americans and Europeans a great deal of money.  Early analysis suggests that for several years, the LIBOR was off by an average of 30 to 40 basis points.  (100 basis points equal one percentage point in an interest rate.)  That is enough, for example, to add $300 to $400 to the annual cost of a $100,000 loan.  

In 2007 and 2008, Americans held $11.1 trillion in outstanding residential mortgage debt.  At the time, between 30 percent and 40 percent of that debt carried adjustable rates.  If the bankers’ manipulations of the LIBOR was responsible for raising LIBOR rates by just 20 basis points in that period, their shenanigans added between $6.6 billion and $8.9 billion to the yearly interest paid by American homeowners.  And those mortgages account for less than one percent of all of the financial assets and instruments affected by manipulated LIBOR rates.  

LIBOR hearkens back to a time when finance operated like a gentlemen’s club, and its leading members behaved honestly.  That is a universe away from the current Wall Street culture and behavior.  They take out bets and pay themselves fortunes for doing so, even when they cannot make good on those bets without taxpayer bailouts. They create securities they know are likely to fail, on behalf of clients prepared to bet against those instruments – and then pawn off the same securities on other clients as safe investments.  And now, we also know that when they bet on interest rates rising or falling, they stacked the LIBOR deck to nudge rates in the direction that made them money.  And they left everybody else with the bill.    

So long as big finance will do almost anything to goose its own profits and bonuses, “self-regulation” is a dangerous myth.  It should give way to sound law enforcement, which in economic terms means more government regulation. 

The Bureau of Labor Statistics released its jobs report for June, finding that the economy added 80,000 jobs last month. Jobs numbers for May were revised upwards to 77,000, and numbers for April were revised downwards to 69,000. The unemployment rate remains at 8.2%

There are some reasons to be optimistic. The manufacturing sector added 11,000 jobs in June – growth in manufacturing jobs during Obama’s first term has been stronger than during Bush’s first term. The health sector added 13,000 jobs, marking the strongest growth of any sector. 

Despite this progress, overall job creation did not keep pace with labor force entry. Thus, a lot of work lies ahead ensuring a strong and continuous recovery. Below is a roundup of economic commentators’ thoughts on today’s jobs report:   

Washington Post’s Ezra Klein sees the numbers as “an overwhelming case for, say, hiring hundreds of thousands of workers to rebuild the nation’s infrastructure, or passing a large employer-side payroll tax cut to goose hiring,” but finds “little chance House Republicans will greenlight either policy response.”

New York Times’ financial correspondent Floyd Norris notes that the dismal numbers are simply following historic seasonal trends 

Slate’s Matthew Yglesias argues that “the dominant factor in the labor market today is weak demand.”

The New Republic’s Noam Scheiber suggests that Obama’s American Jobs Act has the potential to jumpstart the recovery. 

I spent much of last week in Geneva, Switzerland.  Even in that city of global institutions, in the European country most untouched by the continent’s sovereign debt crisis, most conversations found their way to hand-wringing over Europe’s economic decline.  As the Eurozone governments struggle to save their common currency, it is increasingly clear that the misguided austerity policies of many European governments have exacted large tolls on employment and growth.  Moreover, Europe’s economic problems will last much longer than the current debt crisis, even if it ends better than anyone now imagines.  One reason is that capital investment, the foundation of future growth, has been depressed since the crisis of 2008-2009. 

With capital investment persistently slow across most of Europe, political and economic leaders need to ask themselves, where would additional investment produce the greatest benefits?  One part of the answer is the same for Europe as it is here, in the United States.  Perhaps the single most important area of investment today lies in the telecommunication infrastructure, networks and devices on which business and social activity increasingly rely.  Earlier this year, NDN issued a new study I wrote with Kevin Hassett of the American Enterprise Institute on one aspect of this development.  We investigated the impact on job creation in the United States associated with the transition from 2G to 3G infrastructure and devices.  We found that this shift created almost 1.6 million jobs from April 2007 to July 2011, even as overall U.S. employment fell by nearly 5.3 million jobs over the same years.   

The current transition to 4G networks and devices should produce a similar economic bounce, so long as the necessary policies and capital investments are there to help drive it.  For example, since 4G involves more intensive data streams, the transition requires additional spectrum.  It will take strong White House leadership to ensure that the private investment needed to build out more spectrum and related, next generation IP broadband infrastructure are available to support 4G services.  In the process, these advances will promote the President’s larger goals of a strong recovery, job creation and universal broadband.  

Like the economy they enable, these technologies are inherently global.  So, the same dynamics apply to Europe, even in its current straits.  Throughout much of the 1990s, Europe had a real edge over the United States in advanced telecommunications, especially in the mobile or wireless space.  That is no longer the case.  Europe’s transition to 4G, for example, has been much more rocky than ours.  In its latest Digital Agenda report, the European Commission noted that while people and businesses in Europe “are generating enough digital demand to put Europe into sustainable economic growth,” this potential is undermined by a “failure to supply enough fast internet, online content, research and relevant skills.” 

Two years ago, the European Union set a goal of doubling its public investments in advanced telecommunications facilities and skills by 2020, which assumed annual growth in these areas of about six percent.  So far, the actual growth has averaged just two percent.  Moreover, private capital spending on 4G infrastructure across Europe also has lagged the United States.  In 2011 and 2012, American telecom companies invested more than $25 billion per-year in wireless facilities alone.  Yet, since 2007, comparable investments across the European Union, with a GDP slightly larger than ours, have been 15 percent to 40 percent less than in the United States. In response, European Digital Affairs Commissioner Neelie Kroes, warned recently, “Europeans are hungry for digital technologies and more digital choices, but governments and industry are not keeping up with them.  We are shooting ourselves in the foot by under-investing.”

The substantial effects on employment which we documented from the transition from 2G to 3G, and now from 3G to 4G, are signs of larger dynamics at work.  Across professions, industries and nations, Internet technologies have become integral parts of most economic activities and operations.  Moreover, with the advent and dispersion of 4G technologies, wireless Internet has begun to assume a pivotal role in these operations and activities.  National policy and business strategies ignore these developments only at great cost.  

To be sure, both Europe and the United States face special and more immediate challenges today, which neither has yet mastered successfully.  But the task of promoting investment in 4G infrastructure and networks is well within the capacity and understanding of all modern governments and businesses, and should be a national priority.  Fifteen years ago, in the transition to 2G, the United States followed Europe’s example, to America’s benefit.  Today, it is Europe’s turn to follow our spectrum policies and investment strategies. 

This week has seen some new developments in the economic debate. Today, economist Jeffrey Liebman published an op-ed in the Wall Street Journal criticizing Republicans for blocking essential, job-creating public investments and lambasting Mitt Romney’s lack of a jobs plan. Indeed, Romney has not provided any specifics about how his budget proposal would put people back to work. Instead, he merely repeats that, as a veteran of the private sector, he "knows how jobs are created and how jobs are lost.” This Romney camp aphorism may be true in light of a Washington Post article from today documenting the movement of jobs overseas by firms Bain invested in under Romney's leadership. Mitt Romney apparently knows how to create jobs overseas and lose them at home.

As the economic debate escalates, interparty messaging has begun to fracture. Today’s ad “Montana First” depicts Republican Senate candidate Denny Rehberg as a Washington outsider and highlights his opposition to the Ryan budget proposal.

That the proposal is being attacked from within the Republican ranks is not good news for Mitt Romney. The Ryan budget has become a rallying point for Republicans and is a cornerstone of their economic plan. It embodies their economic philosophy that low levels of government spending and taxation will unleash the private sector and create jobs. Despite being proven ineffective, this philosophy is at the core of Romney’s economic message.

Presidents regularly get the credit or blame for developments beyond their control.    Sometimes, they also get no credit or blame for the decisions they do take.  Barack Obama fits both molds.   A fresh example of the second pattern is the President’s surprising semi-breakthrough on European debt, at this week’s G20 meeting in Los Cabos, Mexico.  For months, President Obama and Treasury officials have quietly urged Eurozone leaders to do what it takes to avoid a sovereign debt meltdown, before they tackle long-term reforms.  This week, it looks like it might pay off.  According to reports, Obama emerged from a private huddle with German Chancellor Angela Merkel with her grudging agreement to use Eurozone funds to directly support Spanish and Italian bonds.  For the first time since the crisis began more than two years ago, the country with the deepest pockets has tacitly agreed to stand behind the full faith and credit of its member countries.  If these reports are true, this week’s agreement should hold off a full-blown debt crisis for a while, and with it the prospect of a deep global recession this year.   Yet, how many Americans will give Obama any credit for all this, come November?  

In a similar fashion, Mr. Obama inherited an economy seized by an historic financial meltdown.  His predecessor mismanaged the crisis so badly that it drove the country into the worst recession in 80 years.  Steeling himself against opponents united only by their partisanship, the President unleashed a flood of fiscal and monetary stimulus to arrest America’s downward spiral towards genuine depression.  Six months later, growth resumed and private employment began to increase.  Yet, in November, how much credit will voters give the President for avoiding the worst case scenario?

Instead, the President finds his reelection threatened by an economic reality he can do little to change — namely, that an economy shaken by financial crisis usually recovers very slowly.  In principle, to be sure, his administration might have done more to overcome the economic drag he inherited from Bush.  He might have pressed harder to stabilize the housing market with short term loans for homeowners facing foreclosure.  He might have tried harder to nail down a grand bargain for long-term fiscal balance.  

But the President also recognized the new political reality following the 2010 elections.  However hard he pressed or pushed Congress, neither deal was possible with Tea Party members calling the shots in the House, and Tea Party activists threatening to take down any Republican willing to work with the “enemy.”  Obama did successfully block the hard right program of slash-and-burn budget austerity, which almost certainly would have plunged the economy back into recession, as it did in Britain.  But once again, come November, how much credit will he get for avoiding another downturn? 

This President has shown that he can take care of himself politically.  He may not be able to point to the dismal hand he inherited from Bush, at least not without seeming to whine.  But he can point voters to the numerous troubling aspects of Romney’s economic record in Massachusetts and Bain Capital.  Obama also has the political advantage in many policy areas, since the public generally favor his approach to taxes, Medicare and Medicaid, higher education, and the deficit.

Unhappily, however, the economy is still far from safe and sound.  This week’s news from the G20 meeting will not settle the Eurozone’s economic problems. That leaves the President’s reelection still hostage to the sovereign debt crisis. On top of the Obama-Merkel meeting of minds, the other good news is that Greece’s new government should be able to avoid a precipitous default and chaotic exit from the Euro.  Eventually, Greece almost certainly will default and leave the Euro, but hopefully not before the Eurozone has prepared for it.  

The question remains, then, of what additional arrangements Frau Merkel will accept to reassure international investors that Spain and Italy will not follow Greece’s path.  Time is short, because Europe is already in recession, and such deals are usually pricey.  Moreover, at this moment, European leaders cannot even agree on whether the next step should be uniform banking regulation, a fiscal union, or expanded political authority for the Eurozone.  All of these measures are important for the Eurozone to become a stable economic entity.  But first, the Eurozone has to survive.  That will require what the President has called for all along – measures such as Eurobonds or central bank authority to guarantee that after Greece, no other Eurozone country will ever have to default.