Obama must break his devil’s pact with the banks in order to succeed.
Bruce Bartlett says it was a failure to focus. Paul Krugman says it was a failure of nerve. Nancy Pelosi says it was the economy’s failure. Barack Obama says it was his own failure — to explain that he was, in fact, focused on the economy.
As Krugman rightly stipulates, Monday-morning quarterbacks should say exactly what different play they would have called. Paul’s answer is that the stimulus package should have been bigger. No disagreement: I was one voice calling for a much larger program back when. Yet this answer is not sufficient.
The original sin of Obama’s presidency was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers. Larry Summers. Timothy Geithner. Ben Bernanke. These men had no personal commitment to the goal of an early recovery, no stake in the Democratic Party, no interest in the larger success of Barack Obama. Their primary goal, instead, was and remains to protect their own past decisions and their own professional futures.
Up to a point, one can defend the decisions taken in September-October 2008 under the stress of a rapidly collapsing financial system. The Bush administration was, by that time, nearly defunct. Panic was in the air, as was political blackmail — with the threat that the October through January months might be irreparably brutal. Stopgaps were needed, they were concocted, and they held the line.
But one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.
Team Obama did none of these things. Instead they announced “stress tests,” plainly designed so as to obscure the banks’ true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was “to get credit flowing again.”
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The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading. Their losses on mortgages were concealed — until the fact came out that they’d so neglected basic mortgage paperwork, as to be unable to foreclose in many cases, without the help of forged documents and perjured affidavits.
But new loans? The big banks had given up on that. They no longer did real underwriting. And anyway, who could qualify? Businesses mostly had no investment plans. And homeowners were, to an increasing degree, upside-down on their mortgages and therefore unqualified to refinance.
These facts were obvious to everybody, fueling rage at “bailouts.” They also underlie the economy’s failure to create jobs. What usually happens (and did, for example, in 1994 - 2000) is that credit growth takes over from Keynesian fiscal expansion. Armed with credit, businesses expand, and with higher incomes, public deficits decline. This cannot happen if the financial sector isn’t working.
Geithner, Summers and Bernanke should have known this. One can be fairly sure that they did know it. But Geithner and Bernanke had cast their lots, with continuity and coverup. And Summers, with his own record of deregulation, could hardly have complained.
To counter calls for more action, Team Obama produced sunny forecasts. Their program was right-sized, because anyway unemployment would peak at 8 percent in 2009. So Larry Summers said. In making that forecast, the Obama White House took responsibility for the entire excess of joblessness above eight percent. They made it impossible to blame the ongoing disaster on George W. Bush. If this wasn’t rank incompetence, it was sabotage.
This is why, in a crisis, you need new people. You must be able to attack past administrations, and override old decisions, without directly crossing those who made them.
President Obama didn’t see this. Or perhaps, he didn’t want to see it. His presidential campaign was, after all, from the beginning financed from Wall Street. He chose his team, knowing exactly who they were. And this tells us what we need to know, about who he really is.
James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. He teaches at The University of Texas at Austin.
*This post originally appeared at Common Cause.
3 Comments
‘They made it impossible to blame the ongoing disaster on George W. Bush. If this wasn't rank incompetence, it was sabotage.’
I was wondering when one of the bloggers at NewDeal 2.0 would express the opinion which has appeared obvious for the past two years; i.e., President B Obama appears to be acting the leading role in a predetermined stage performance. If there were any qualified personnel in the Democratic Party, one might just guess that a Democratic President might select such or, possibly, an Independent or a disaffected Republican; however, the leaders of the Federal Reserve, Department of Treasury, Pentagon, etc. are all holdovers from the truly catastrophic G W Bush administration. Republican politicians have been behaving as usual (i.e., badly) since the 2008 election, yet, few economics experts seem to factor in the obvious when they talk about policy. I suspect that most sane Americans are unhappy with a ‘role player’ who doesn’t mind saying one thing prior to election, then, doing the opposite arter election.
One might wonder (a) whether members of the economics community are able to connect the dots and (b) the extent to which (non-right wing) economists depend upon funding via government grants.
Posted by William Wilson | November 5th, 2010 at 5:26 pm
Prof. Galbraith,
I have all the respect I can muster for you and for what you are doing.
Thank you.
Resp,
PS: ‘Galbraith-Mosler 2012′ ?
Posted by Matt Franko | November 5th, 2010 at 11:13 pm
Geithner, Summers and Bernanke should have known this.
Well, we did know one thing for sure as soon they decided not to force repricing of mortgage securities and the disentanglement of the underlying CDO’s.
And that is that the market would unwind them one way or another, and that the economy would struggle until it did.
But I am no longer sure Bernanke or most bankers understood that at all. Do they understand it now?
For if they do, they are now willfully throwing good money after bad, and knowingly making the people pay for a situation that should have been primarily and quickly resolved in bankruptcy court.
Those toxic securities should have been repriced, and the market restored years ago now. They are killing our economy. As it is, we should be winding down the Fed as a complete and utter failure; their models fundamentally incorrect, their ability to protect the economy non-existent.
Posted by WhiskeyJim | November 5th, 2010 at 11:39 pm
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Obama must break his devil’s pact with the banks in order to succeed.
Bruce Bartlett says it was a failure to focus. Paul Krugman says it was a failure of nerve. Nancy Pelosi says it was the economy’s failure. Barack Obama says it was his own failure — to explain that he was, in fact, focused on the economy.
As Krugman rightly stipulates, Monday-morning quarterbacks should say exactly what different play they would have called. Paul’s answer is that the stimulus package should have been bigger. No disagreement: I was one voice calling for a much larger program back when. Yet this answer is not sufficient.
The original sin of Obama’s presidency was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers. Larry Summers. Timothy Geithner. Ben Bernanke. These men had no personal commitment to the goal of an early recovery, no stake in the Democratic Party, no interest in the larger success of Barack Obama. Their primary goal, instead, was and remains to protect their own past decisions and their own professional futures.
Up to a point, one can defend the decisions taken in September-October 2008 under the stress of a rapidly collapsing financial system. The Bush administration was, by that time, nearly defunct. Panic was in the air, as was political blackmail — with the threat that the October through January months might be irreparably brutal. Stopgaps were needed, they were concocted, and they held the line.
But one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.
Team Obama did none of these things. Instead they announced “stress tests,” plainly designed so as to obscure the banks’ true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was “to get credit flowing again.”
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