John Cassidy has an article in the most recent New York Review of Books, The Economy: Why They Failed, on just how badly the Obama administration has failed. None of this will come as any great surprise to regular readers, of course, but there are some interesting tidbits in Cassidy's article that deserve some attention. Part of the appeal of this article is the calm, almost dry, recounting of the actions the Obama administration has taken, granting them every claim they have made about why X was necessary or why Z wouldn't work. Cassidy then throws in the counter factuals, and blows the arguments out of the water.
He starts with an evenhanded recounting of the financial rescue and its results, distinguishing between the formal recovery on a macroeconomic scale and the actual recovery on an individual human scale:
Only on Wall Street was the recovery palpable, however. In September 2010, 9.6 percent of the US workforce was still out of work, and that didn’t include more than eleven million people who had stopped looking for jobs or who had been forced to accept part-time employment. Taking account of these people, the September 2010 rate of “underemployment” was 17.1 percent—about one in six. Even for those fortunate enough to be working, worries remained. Many households were saddled with mortgages bigger than the value of their homes. In Miami, real estate prices were about 50 percent below their 2006 peak; in Las Vegas, they were down 55 percent; nationwide, the decline was about 30 percent. Rather than going out and spending, many households and firms were hoarding cash and rebuilding their savings. In the second quarter of 2010, the annualized growth rate of US GDP fell back to 1.6 percent, raising more fears of a return to recession. ...Geithner's statement, to me, neatly encapsulates the fundamental problem of the administration - they don't see "saving the economy" as something done for the sake of the public. The playground for the Wall Street kidz was set to rights, the aggregate numbers looked good, therefore the mission was accomplished. This was not an accident or oversight, but a deliberate goal, "The Obama administration didn’t come out and say so, but enabling the banks to make big profits was one of its policy objectives. Rather than seizing control of sickly institutions, such as Citi and Bank of America, it had settled on a policy of allowing them to earn their way back to sound health, while also encouraging them to raise money from private investors." To hear Geithner, you'd think the problem is just that the dim public couldn't follow the intricacies of high finance rather than the truth, which is that the administration selected specific policies to favor banking interests above all others claims on government's power. The policies had the desired results:
If this was a recovery, it was a fragile and embittered one. While the authorities’ response to the crisis had prevented a wholesale economic collapse, it had failed the political test of winning popular support—something Timothy Geithner freely admitted. “My basic view is that we did a pretty successful job of putting out a severe financial crisis and avoiding a Great Depression or Great Deflation type of thing,” the Treasury secretary told me in early 2010. “We saved the economy, but we kind of lost the public doing it.”
When these enormous profits duly materialized and the banks distributed some of them to their employees, the public was outraged. Critics accused the Obama administration of overlooking less offensive options for stabilizing the financial system. One idea, widely canvassed in early 2009, would have been to seize control of troubled firms, move their tarnished assets into a state-run “bad bank,” and eventually refloat them on the stock market as smaller, healthier institutions. Twenty years previously, during the savings and loans crisis, this approach had been adopted successfully. Theoretically, it would have enabled the government to fire reckless bank managers, wipe out bank shareholders, and impose a “haircut,” i.e., a reduction in repayments, on bank creditors, thereby punishing the guilty rather than rewarding them with a bailout. “While the Obama administration had avoided the conservatorship route, what it did was far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses,” the Nobel-winning economist Joseph Stiglitz wrote in his 2010 book, Freefall: America, Free Markets, and the Sinking of the World Economy.And so we get to the real culprit - a lack of political will power. The "radicalism" and "big government" move, of course, would have been doing the same things as Reagan and Bush oversaw the S&L crisis. This knowledge, that they could not muster up even the regulatory nerve of a conservative Republican administration puts the lie to Obama's claims of having been so daring that he outdid that financial coward, FDR. Cassidy does an elegant rundown of what FDR-the-slacker actually accomplished - basically, laying the ground work of institutions that saved nation's collective ass over the last two years:
Members of the administration countered that its critics had greatly underestimated the practical difficulty of pursuing the nationalization option. If the government had seized Citigroup, one senior Treasury official told me, it could well have created creditor “runs” at other banks suspected of being on the government target list. The only way to prevent this from happening, the official said, would have been to spend $3 trillion and take over all the big banks. That figure may be an exaggeration, but the fear of sparking another financial crisis was a real one, and so were the political concerns of the White House and the Treasury Department. Neither President Obama nor Geithner had any appetite for a policy that smacked of radicalism and big government.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed in July 2010, while containing many worthwhile individual measures, didn’t really get to grips with this problem. Taken overall, the reform effort amounts to tinkering with the existing system rather than fundamentally reforming it. Any comparison with FDR’s regulatory response to the Great Depression is specious. By the end of Roosevelt’s first term, the financial system had been transformed. The House of Morgan and other big banks had been split up into their investment banking and commercial banking components; through the newly founded SEC, the government was exercising close supervision of Wall Street; through the Reconstruction Finance Corporation, which had acquired and kept equity stakes in many big financial firms, it was forcing reluctant bankers to extend credit; and through the Justice Department, it was prosecuting a number of prominent financiers. Today the financial system looks overall pretty much the same as it did in 2007, even though at the end of 2010 there are fewer independent Wall Street firms than there were a few years ago, and the survivors have a bit less freedom to maneuver than they used to have.A transactional politician transforming the fundamental rules of the financial game. Whooda thunk it? Certainly not the crew currently in the White House. What they did do was deliberately undermine the work of the Congress to make the too-modest reforms have some meaningful teeth:
But far from insisting on drastic reductions in leverage and smaller banks, the Obama administration connived against measures designed to bring these changes about. Senator Susan Collins, of Maine, and Senator Blanche Lincoln, of Arkansas, both proposed amendments to the Dodd-Frank bill that would have forced the biggest banks to hold substantially more capital—and real capital, not hybrid securities that are more like debt. After the Senate passed the Collins and Lincoln amendments, the White House and Treasury pushed Congress to drop them from the final legislation. A move to break up the biggest banks, such as Wells Fargo and Bank of America, which was sponsored by Senator Ted Kaufman, of Delaware, and Senator Sherrod Brown, of Ohio, didn’t even get that far. The Democratic leadership in the Senate joined with Republicans to kill the amendment, which was voted down 61–33. “If we’d been for it, it probably would have passed,” a senior Treasury official told New York magazine. “But we weren’t, so it didn’t.”When you are working to the right of Blue Dog Blanche, you don't have much to stand on.
In the end, the facts of how the "recovery" was engineered point the political failure of the administration:
Barely a year and a half after the collapse of Lehman Brothers, Wall Street was once again doing well for itself—obscenely well, it seemed to many people. “For most Americans, these huge bonuses are a bitter pill and hard to comprehend,” noted Thomas DiNapoli, the comptroller of New York State, whose office tracks Wall Street profits. “Taxpayers bailed them out, and now they’re back making money while many New York families are still struggling to make ends meet.”No, not really hard to comprehend. Difficult to stomach is more like it. It's Wall Street business as usual. The failure is as simple as not enforcing some measure of fairness, proportion or limit on the money offered to the people who brought on the collapse in the first place, let alone actually implementing structural changes that would prevent it from happening again.
Yes, Timmy. You've lost the public big time. Then again, you never looked for it in the first place.