By refusing to stand up to the finance oligarchs, the Obama Admistration fed the cynics and dissipated the opportunity for real change.
We live in an era where the effectiveness of government has been denigrated for more than 30 years. The echo chamber of the right, particularly since the election of Ronald Reagan, has sought to intimidate anyone who let the romantic notion into their head that government can help. They even denigrate the New Deal, like it was a bad dream rather than a series of programs that helped many people, and may have saved capitalism from itself.
With the romance of government trampled, the void in social theory was filled by the romance of markets. The free market fundamentalists vehemently promoted the notion that markets were not just a means to achieve social goals. To their way of thinking, social goals themselves would have to be designed to curry favor with the "wisdom" of the market.
In the years from Reagan to Bush II, we experienced "Capitalism Unleashed," as the late Andrew Glyn titled his fine treatment of this period of history. Distribution of income and wealth became more concentrated at the top; productivity growth and profit soared; wages were flat; and finally, outsourcing, foreign direct investment and the stress of bringing labor-intensive, low-wage countries like China into the world economy caused severe adjustment pain. Yet none of this stress really shook the romance out of free market fundamentalism. The pain was temporary, and better times would surely come, they said.
That all changed with the Financial Crisis of 2007.
Entering A World of Pain
The real economic spillovers and side effects of Wall Street-leverage and rocket-science concoctions brought the curtain down on the romance with the unfettered free market. This was a mess that did not need to happen. It was a calamity that will cost the world economy trillions of dollars.
This is the stage that President Obama walked onto when he made his run and was elected to the White House. Government romance had been pounded out of the hearts of Americans for decades. Yet now free market fantasies were in tatters. For Obama, seeds of opportunity were contained in the crisis.
What was remarkable about Obama was his seemingly magical ability to inspire us all to suspend our cynicism about civic engagement and government and give things a new try. Sure, he had help from the dreadful examples of his predecessor's work on Katrina, Iraq, torture and the TARP bailout. Yet he pulled it off, and the idea of a strong leader steering us through a crisis brought visions of FDR into the minds of many.
We took comfort in the notion that "the best and brightest" would be taking over. The Administration promised bold actions on many fronts, including stimulus, climate change, financial regulation, bailout policy and healthcare.
Just after the inauguration, many in the markets felt that a bold financial plan would be announced. It would be something strong -- something like what the team of Summers and Geithner had recommended in the 1990s to the Asian developing countries and Japan. Hopes were high that the return of the dynamic duo to government service would lead to immediate action to restructure the banks and bold steps to regulate the capital markets. All of this would be needed to clear away the financial wreckage and get capital flowing again.
Botching the Bailout
Instead, we got nothing on inauguration day. We got a plan-to-have-a-plan in early February, followed by the announcement of PPIP and infinite forbearance through an intravenous-drip system of capital injections so that the behemoth banks, their executives, their stockholders -- and most profoundly, their unsecured creditors -- could hold onto their money. We got that, coupled with the announcement of AIG bonuses. As a final insult, we heard Administration officials waxing on about the sanctity of contracts while the autoworkers' benefits and pensions were being restructured. The public was rightly enraged.
At the time, I argued that failure to restructure these too-big-to-fail banks would be costly in three ways. 1) Budget costs; 2) The enhanced risk of a future crisis by leaving the too-big-to-fail firms to repeat their feats (heads they win, tails the taxpayer loses); and 3) The impact on Obama's ability to inspire people to believe in the good government could do.
In the realm of budget costs, proper restructuring of the unsecured debt of Citigroup and BofA, among others, would have obviated the need to increase public debt. As we all now know, the deficit hawks -- apparently vacationing underwater from October to March when the bailouts were constructed -- came back in full force. The result? Future programs would have to be curtailed and the future economy might have to be burdened with taxes so that bondholders who made foolish risky bets that included no government guarantees could get their money back.
A second cost would be that these large, unresolved zombie institutions would remain in the market. They could rightly be considered as off-balance-sheet contingent liabilities for the future. In other words, they were the seed corn of a future crisis and another future costly bailout. We missed the chance to break them up and diminish this possible danger.
Wasting the Crisis
The whispers around the Treasury and White House suggested there were legal difficulties associated with inadequate "resolution powers." We heard murmurs about the complexity of derivatives books and the dangers to the real economy of trying to close the large financial holding companies. No one wanted another "Lehman."
In the end, we saw no effort to pass emergency legislation to make it easier to handle these Too-Big-and- Complicated-to-Resolve institutions. That alone raised suspicions that our public servants might not be, first and foremost, working to defend the taxpayers. Yet to be fair to the Administration, they faced daunting hurdles. Congress was not going to execute emergency legislation in front of a bank lobby that was unlikely to stand by and watch their stockholdings zeroed out and their executives become more vulnerable to firing.
Other insiders with a more international orientation whispered about the fragile nature of the foreign exchange value of the dollar. They hinted that government takeover of major brand-name institutions and write downs of bank debt would damage the confidence of the foreign investor who held "conjectural guarantees" that the U.S. would support all elements of its financial system.
It is often said: to run an international empire one has to "waive the rules in order to rule the waves."
The rules were waived; the bank creditors won. Witness the bond king Bill Gross of Pimco -- perhaps the most gutsy gambler on conjectural guarantees-enjoying his new $23 million dollar home in California while the taxpayers have inherited a cadre of shameless financiers and experts telling us that we have to cut entitlements to stabilize our public finances.
You've Lost that Loving Feeling
We're now beginning to understand the details. In the first major act of this financial farce, the question was raised: will Wall Street rule Washington or will the White House govern finance? The White House whiffed. As Simon Johnson's characterization of Wall Street's oligarchs touched a nerve, Obama even tried to use his magical oratory gifts to reframe strength as the act of resisting the temptation to settle scores with financiers rather than finding the spine to stand up on behalf of the general interest. No one really bought it.
The Administration's exercise in government risk-management-of choosing forbearance with the big banks over this risk of "another Lehman" -- made sense in isolation. What it missed was an awareness of the historic context and opportunity. Free markets had profoundly failed. Government had been given another chance by the electorate that was inspired by candidate Obama. A chance to do some good for the general interest and regain the reputation of a productive public sector after thirty years of disparagement. Yet by refusing to stand up to the oligarchs and set proper boundaries in defense of society, they fed the cynics and dissipated the magic that Obama had created for real change. The Administration seemed closer to Jamie (Dimon) and Goldman Sachs than to us. The lesson: if you fail to defend society once, people lose faith. The loss of faith carries a high price, and we're paying that price now in the arena of healthcare reform.
We Gotta Get Out of This Place
This is not Monday morning quarterbacking. I spoke at the time in many public forums about the risk of missing this chance to inspire respect for public service that would result from pandering to finance. Martin Wolf of the Financial Times wrote about it vigorously. He could see the dangers clearly. On February 10, 2009 he said in print:
Has Barack Obama's presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
Loss of faith in government limits what we can achieve together. Obama created space for the suspension of cynicism about government after thirty years of denigration. This was of tremendous potential value, but the administration blew it in the first major act. The Chicago School, which fanned the flames of the romance of markets, can certainly now divert attention from their failings and point to the work of Chicago Nobel Prize winner George Stigler on regulatory capture, and say "I told you so" to the romantic liberals whose faith in the capacity of government to respond to market failures has been shattered.
As Paul Krugman said recently in his New York Times column,
I don't know if administration officials realize just how much damage they've done themselves with their kid-gloves treatment of the financial industry, just how badly the spectacle of government supported institutions paying giant bonuses is playing. But I've had many conversations with people who voted for Mr. Obama, yet dismiss the stimulus as a total waste of money. When I press them, it turns out that they're really angry about the bailouts rather than the stimulus...
Somebody Got to Help Me, I Can't Help Myself
The financial sector issues have receded into the background for a time. But the residue of anger and distrust has not, as we're now seeing with healthcare. At a logical level, the nature of the debate seems crazy. Blue Dogs wrap themselves in the mantle of "budget discipline" while opposing the things that would cut federal expenditures on healthcare costs. Seniors are screaming at senators and congressman to keep the government away from their Medicare (a government program.)
These are the facts:
- We pay twice as much for healthcare as citizens of other countries, yet we have poor measured relative performance.
- The Administration rather meekly supports a public option while, having rejected the single payer plans in the pregame ceremonies.
- The radical right and the insurance industry have turned on the public option, invoking comparisons to Freddie Mac and Fannie Mae.
- Pundits on the right like Greg Mankiw paint visions of an unfair competition between a competitive private sector insurance industry and a GSE-like public option entity that could unfairly dip into the taxpayer and drive the private firms out of business. (Leave aside for the moment that Mankiw's vision is somewhat silly in an oligopolistic market place where what would be disciplined is the excess profits arising from the monopoly power of insurance companies vis a vis the population.)
Yet let's be fair and not get confused by the confusion. Anyone who saw the handouts to Wall Street started by Paulson/Bush and continued by Geither/Obama has substantial basis for doubting that a public insurance company would operate on an actuarialy fair basis and not hit the taxpayer with a backdoor bill after driving out the private competition. This is what happens when we lose faith. Put simply, after the financial bailouts, few believe that the Obama Administration will act as a fair referee. Why trust someone to enforce proper boundaries in one highly visible context when they have failed to do so in another realm?
The Administration's credibility and ability to inspire has been damaged by their actions in the bailout arena. We are back to the place where we can envision good policies but no one trusts that our government can deliver and execute them. The public option suffers as a result. The Administration acts surprised --they rightly sense they have lost control of the process and are now back to beating up the left for making the public option their Waterloo. Connect the dots, ladies and gentleman of the Administration, You blew finance, so you lost control of healthcare.
In the most recent issue of Rolling Stone, Matt Taibbi, who wrote quite favorably about Obama during the campaign, renders the following verdict on the US political system after the failure of the healthcare reforms.
The bad news is our failed health care 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.
That verdict is a depressing one. Yet I sense many would agree with it. We all know that our health care system has failed. (See Bill Moyers' Journal Friday August 28th airing of Money Driven Medicine based on Maggie Mahar's fine book of the same name to see just how broken it is, and how no bill currently on the table will even get close to fixing it.) In the aftermath of the financial crisis and the early Obama experience, we have a shattered society with little faith in markets or in the capacity of government to make us better off. Experts, particularly in finance, have let us down. We view politicians as salesmen for bad causes rather than leaders. We did not need to be here. Obama could have done better. He had our attention.
Our president is now in a place, as Martha Reeves once sang, with Nowhere to Run and Nowhere to Hide. Having fumbled on finance, Obama has to show the American people why we elected him, or be at risk of losing his job. He could have relied on the people that he inspired to elect him. Instead he was cautious and did business as usual inside the Beltway. He took care of industry groups. Now it will be harder for him to inspire all of us.
Trust has diminished. A crisis was wasted. It is sad that in a very short time we are a long, long way from hope we can believe in.
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