ON FEBRUARY 10th, the New York Times reported that there had been a “spirited” battle within the Obama administration over restrictions on executive pay and bonuses, and over attaching stringent conditions to any bailout money given to banks.
The clash pitted Tim Geithner, who opposed the restrictions and conditions, against David Axelrod, who favored them. According to the Times, Geithner had “largely prevailed.”
In light of what has happened since then, that outcome must now be viewed as a tragic surrender to Geithner, Summers, and the political/Wall Street class — a “victory” that could lead to the unraveling of the president’s entire economic policy.
Maintaining the public trust is always important for a leader, but especially so during hard times. There is a fascinating chapter on Nelson Mandela in Stan Greenberg’s new book, Dispatches from the War Room, in which Greenberg writes about how even the revered Mandela suffered a loss of public confidence when change did not come fast enough after he took office. “Don’t assume the current euphoria, even with your high approval rating will carry you through,” Greenberg counsels Obama, stressing the need to try to build up enough trust so that the public will stay with the president until they can actually experience change.
The Axelrod camp understood this and, according to the Times‘ February story, argued that “rising joblessness, populist outrage over Wall Street bonuses and expensive perks, and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.”
Axelrod was right. And his loss has already cost the young Obama administration a lot.
No wonder the public is not convinced when Geithner, having laid the groundwork that made the AIG bonuses possible, and having gotten Chris Dodd to include a bonus loophole in the stimulus bill, now acts shocked over the bonuses.
Geithner’s feigned surprise at AIG has been a body blow to public confidence in the president. According to Sunday’s Rassmussen poll, just 12 percent of those Rassmussen defines as “Populists” have a favorable opinion of Geithner while those Rassmussen identifies as “America’s Political Class” have a 76 percent favorable opinion of him.
It was painful to watch Obama, just hours after Geithner had admitted his role in the Dodd/bonus loophole affair, go on Jay Leno and say that Geithner is doing an “outstanding job.” Even before Frank Rich’s Sunday column was titled “Has a ‘Katrina Moment’ Arrived?,” Obama’s assessment had more than a whiff of Bush telling Brownie he was “doing a heck of a job.”
My dictionary defines outstanding as “excellent, exceptional, superior to others in the same category.” So how could Obama say that and then, not a minute later, tell Leno that his administration plans to “open up separate credit lines outside of banks for small businesses” and “set up a securitized market for student loans and auto loans outside of the banking system” in order to “get credit flowing again”?
Back in January, after the Senate voted to release the second $350 billion tranche of TARP money, Obama had told the nation that he was “gratified” he’d been given the authority to “maintain the flow of credit to families and businesses.”
Now, here he was, just over two months later, basically admitting that we have to find other ways to “maintain the flow of credit to families and businesses” — completely contradicting a central tenet of the bank bailout, expressed by Axelrod in January when he told George Stephanopoulos that the president was “going to have a strong message for the bankers. We want to see credit flowing again. We don’t want them to sit on any money that they get from taxpayers… And we have to make sure that the money doesn’t go to excessive CEO pay and dividends when it should be going to lending.”
Then Geithner happened. According to the Times, during the internal debate the Treasury Secretary “resisted those who wanted to dictate how banks would spend their rescue money.” And we see how well that turned out.
The AIG bonus backlash is the first serious threat to the Obama administration. It has created an opening that allows conservatives to storm the populist barricades, suddenly acting like the second coming of Huey Long or Upton Sinclair.
Shameless opportunists like Mitch McConnell, Richard Shelby, and Eric Cantor, who have all argued against limiting executive pay and bonuses, are now positioning themselves in front of the populist parade, railing against AIG and pointing the finger at Obama for allowing this to happen on his watch.
Yes, the same free-market ideologues who were instrumental in bringing America to the brink of economic disaster are now arming themselves with pitchforks and torches.
It would be laughable if it weren’t so dangerous — serving to undercut the essential narrative of how we got into the current crisis and, therefore, how we can get out of it.
On Leno, the president lauded Geithner as “a smart guy…a calm and steady guy” who is dealing with a surfeit of crises “with grace and good humor.” And he’s clearly very hard working, reportedly arriving at the Treasury at 6:30 in the morning and leaving at 9:30 at night. But no one disputes Geithner’s intelligence, steadiness, and work ethic.
And neither is the problem Geithner’s lack of comfort in the public arena. “When you run a Fed bank,” a senior Democratic operative told Chris Cillizza, “you live deep in a cave. [Geithner] just needs to get used to the sunlight.”
But the issue isn’t Geithner’s delivery, it’s what he’s delivering: an approach to the crisis that is as toxic as the assets that have hamstrung the economy. Geithner, brilliant and hardworking though he is, is trapped within a Wall Street-centric view of the world and seems incapable of escaping.
That’s why every proposal he comes up with is déjà vu all over again — a remixed variation on the same tried-and-failed let-the-bankers-work-it-out approach championed by his predecessor, Hank Paulson. For Paul Krugman, this “insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid?”
I don’t believe Geithner thinks we’re stupid (although he almost certainly doesn’t think we’re as smart as he is). He just can’t change who he is: a creature of Wall Street, habitually sympathetic to the people at the top of the financial system, who he clearly thinks were born to run the world.
Geithner’s actions throughout his career are proof that the toxic thinking that got us into this mess is part of his DNA.
While President of the New York Fed, he eliminated two key regulatory measures — a quarterly risk report and a ban on major acquisitions — that may have prevented (or at least lessened the impact of) the unraveling of Citigroup, which his office was responsible for supervising. Then, together with Hank Paulson, he was instrumental in the original bailout of AIG and the creation of the TARP plan. And he was a key player in the decision to let Lehman Brothers fail.
And now he surrounds himself with others who share his Wall Street Weltenschauung, including his chief of staff Mark Patterson, a former lobbyist for Goldman Sachs who had lobbied againstthen-Senator Obama’s 2007 bill to reform CEO pay.
Geithner’s Masters of the Universe, the people he still thinks are the ones we should turn to to save the day, are the same people who brought us here. And that is why Geithner either needs to go or keep his job but have his authority stripped and transferred to someone who does not share his Wall Street DNA. Call him or her the “Recovery Czar.”
In other words, use any window dressing you want, just take the steering wheel out of Geithner’s hands.
It might seem extraordinary to be calling for the resignation or demotion of President Obama’s point man on our financial system.
But let me remind you of a few other things that are extraordinary: the government has spent $2.2 trillion and committed another $7.7 trillion to bolster America’s struggling financial system; $7 trillion of shareholders’ wealth was lost in the stock market in 2008; over 4.2 million jobs have been lost in the last 14 months; 2.3 million houses were foreclosed in 2008, with another 121,756 foreclosures last month alone.
Things that we never would have imagined are happening all around us. So this is a time for doing things that might have seemed unthinkable just a month ago.
A month ago… when Tim Geithner gambled the administration’s political capital, putting his money — actually our money — on the behavior of bankers and CEOs who continue to operate as if it is business as usual.
A month ago… when Geithner crossed swords with Axelrod, winning the battle and losing the war.
Socialite, media celeb, and political dilettante Arianna Huffington, liberal but certainly no flaming radical, founded The HuffingtonPost.com, where this article was first published. The fact she has taken a populist position in actuality to the left of Obama and his inner circle underscores what Cyrano’s editors have pointed out repeatedly: that Obama is too much an extremist of the center to fix a systemic crisis such as we face today. We reproduce this material under Fair Use protocols.
Financial Policy Despair
After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.
It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.
Let’s talk for a moment about the economics of the situation.
Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.
As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.
That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.
But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.
And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.
But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.
The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.
But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.
Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.
All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.
Paul Krugman, onetime subject of vituperation and physical intimidation by blowhard Bill O’Reilly, is an Economics Nobel Prize winner, and columnist for the New York Times.