Pete Souza/White House
President Barack Obama and Treasury Secretary Timothy
Geithner during the G20 summit in Cannes, France, November 2011
In the spring of 2012 the Obama campaign decided to go after Mitt Romney’s
record at Bain Capital, a private-equity firm that had specialized in taking
over companies and extracting money for its investors—sometimes by promoting
growth, but often at workers’ expense instead. Indeed, there were several cases
in which Bain managed to profit even as it drove its takeover targets into
bankruptcy.
So there was plenty of justification for an attack on Romney’s Bain record,
and there were also clear political reasons to make that attack. For one thing,
it had worked for Ted Kennedy, who used tales of workers injured by Bain to good
effect against Romney in the 1994 Massachusetts Senate race. Also, to the extent
that Romney had any real campaign theme to offer, it was his claim that as a
successful businessman he could fix the economy where Obama had not. Pointing
out both the many shadows in that business record and the extent to which what
was good for Bain was definitely not good for America therefore made sense.
Yet as we were writing this review, two prominent Democratic politicians
stepped up to undercut Obama’s message. First, Cory Booker, the mayor of Newark,
described the attacks on private equity as “nauseating.”
Then none other than
Bill Clinton piped up to describe Romney’s record as “sterling,” adding, “I
don’t think we ought to get into the position where we say ‘This is bad work.
This is good work.’” (He later appeared with Obama and said that a Romney
presidency would be “calamitous.”)
What was going on? The answer gets to the heart of the
disappointments—political and economic—of the Obama years.
When Obama was elected in 2008, many progressives looked forward to a replay
of the New Deal. The economic situation was, after all, strikingly similar. As
in the 1930s, a runaway financial system had led first to excessive private
debt, then financial crisis; the slump that followed (and that persists to this
day), while not as severe as the Great Depression, bears an obvious family
resemblance. So why shouldn’t policy and politics follow a similar script?
But while the economy now may bear a strong resemblance to that of the 1930s,
the political scene does not, because neither the Democrats nor the Republicans
are what once they were. Coming into the Obama presidency, much of the
Democratic Party was close to, one might almost say captured by, the very
financial interests that brought on the crisis; and as the Booker and Clinton
incidents showed, some of the party still is. Meanwhile, Republicans have become
extremists in a way they weren’t three generations ago; contrast the total
opposition Obama has faced on economic issues with the fact that most
Republicans in Congress voted for, not against, FDR’s crowning achievement, the
Social Security Act of 1935.
These changes in America’s political parties explain both why
there has been no second New Deal and why the policy response to the prolonged
economic slump has been so inadequate. The partial capture of the Democratic
Party by Wall Street and the distorting effect of that capture on policy are
central themes of Noam Scheiber’s The Escape Artists: How Obama’s Team
Fumbled the Recovery, an inside account of Obama’s economic team from the
early days of the presidential transition to late 2011.
Scheiber starts with the influence Wall Street exerted over the assembly of
that economic team. In its early stages, Scheiber tells us, Obama’s campaign
relied for policy advice on “obscure academics, contrarian gadflies, and
past-their-prime bureaucrats,” like Austan Goolsbee, a young economics professor
from the University of Chicago, and Paul Volcker, the octogenarian though still
vigorous former chairman of the Federal Reserve. But by September 2008, another
economic group had formed and begun competing for influence, composed of
“well-heeled insiders. Most [of them] had worked for former Clinton Treasury
secretary Robert Rubin.” Rubin had been a partner at Goldman Sachs before
joining the Clinton administration; after leaving, he became a director and
counselor, and then chairman, of Citigroup.
Soon, the latecomers had completely superseded the early team. For example,
the person charged with vetting potential economic hires was Jason Furman, a
seasoned Washington economist who ran the Hamilton Project, a neoliberal think
tank founded by Rubin and funded by Democratic-friendly financiers. Mike Froman,
an aide to Rubin during his tenure as treasury secretary who then followed Rubin
to Citigroup, was the personnel chief of Obama’s transition team. It was he who
put forward Larry Summers and Tim Geithner as the leading candidates for
treasury secretary.
Summers, the Harvard economist and former undersecretary of the treasury
under Robert Rubin, who then succeeded him as treasury secretary, as well as
being an adviser to a Wall Street hedge fund, would become Obama’s top economics
aide as director of the National Economic Council. Geithner, who had been
Summers’s lieutenant while at the Clinton Treasury and was later chairman of the
Federal Reserve Bank of New York, had been one of three people who had acted to
save the country’s biggest banks—on terms congenial to the banks—during the fall
of 2008. As Scheiber writes, “By putting Mike Froman in charge of hiring, Obama
was, in effect, choosing to staff his administration with insiders and
establishmentarians.”
The dominance of Rubinites in the new administration shocked
many progressives, since for many the Clinton-supported repeal of the
Glass-Steagall Act, advocated by Robert Rubin but opposed by Paul Volcker,
symbolized the extent to which the financial crisis of 2008 was hatched in the
overly friendly relationship between the Clinton administration and Wall Street.
It’s true that Glass-Steagall, a Great Depression–era law that forbade the
mixing of securities trading and accepting
FDIC-insured
deposits under the same corporate roof, wouldn’t have prevented the 2008
implosion of Wall Street. Instead, it was extraordinarily high levels of
leverage at investment banks like Lehman and Merrill Lynch, as well as the
holding of huge portfolios of toxic subprime mortgages by deposit-taking banks
like Bank of America, that were the fuel for the conflagration. But progressives
were right to feel that Wall Street had been dangerously underregulated for too
long and that the entire country was now paying the price.
Yet those concerns fell on deaf ears within the new administration. As
Scheiber recounts, when one Democratic senator protested that the team headed by
Geithner and Summers had been too sympathetic to Wall Street during the 1990s,
Obama dismissed the concerns, stating that “he needed people he could count on
in a crisis. Besides,…they
had changed.”
Was it all some kind of conspiracy? No—as Scheiber explains, it was less
purposeful and more complicated than that. Partly it was Obama’s need for
experienced hands and immediate credibility in the middle of the worst financial
crisis since the Great Depression. Partly it was due to Obama’s insouciance
about political optics. But it’s also clear that Obama’s personality and
temperament played the crucial part in aligning his fortunes with Rubinites; as
Scheiber acutely observes, Obama and Geithner bonded over similar childhoods as
ex-pats and an understated, self-deprecating style that avoided direct conflict.
No doubt Obama’s all-star economic team gave him the “intellectual affirmation”
that Scheiber notes “he craved.”
But while the team may have given Obama intellectual affirmation, it didn’t
give him very good advice. In the end, Obama’s response to the financial crisis
was both lopsided and inadequate: Wall Street received a lavish bailout, with
remarkably few strings attached, while workers and homeowners were let down by
radically underpowered plans for stimulus and debt relief.
True, not all members of the team got it wrong. We now know in particular
that Christina Romer, the Berkeley professor appointed to head Obama’s Council
of Economic Advisers, called from the beginning for a much larger economic
stimulus than the administration ever proposed. But Romer was sidelined and it
was Larry Summers—a person not shy about displaying his brilliance—who had
Obama’s ear. In principle, that needn’t have made much difference; when wearing
his academic hat, Summers espouses Keynesian economic views not noticeably
different from Romer’s (or ours). But Summers, rather than passing on straight
economic analysis, tried to show his political astuteness about what Congress
would accept, and as a result underplayed the case for a bigger stimulus.
But it is Tim Geithner, Obama’s treasury secretary, who
appears, even more than Obama, as the decider in this saga. In contrast to
Summers, whom Scheiber portrays as a flexible, reformist Rubinite, willing to
alter his views in the face of evidence, believing in particular that
shareholders of bailed-out banks could and should pay more to taxpayers,
Geithner is described as a doctrinaire Rubinite who viewed his primary task as
one of restoring financial market confidence, which in his mind meant doing
nothing that might upset Wall Street.
Thus, while a financial bailout was undoubtedly necessary, Geithner bucked
Summers and even Obama by engineering a bailout in which taxpayers assumed all
the risk but got nothing in return; in which Goldman Sachs’s speculative trades
against
AIG, which pushed
AIG over the
edge, were honored in full and paid from the government’s bailout of
AIG; and in which the plan for regulating derivatives was, as
one lobbyist said, “the plan [derivatives] dealers had come forward with.” There
would, of course, be no discussion of blame, no hint that the bankers had done a
bad thing by putting the economy in such a predicament. That would, after all,
undermine confidence.
How did Geithner manage to dominate policy so completely? Partly it was his
skill at inside politics; even when he couldn’t win an argument outright he
would win by other means. Often he would simply wait people out; this was his
tactic with Rahm Emanuel, knowing that Emanuel’s manic attention would
eventually turn elsewhere. And crucially, Geithner was enabled by Obama’s
unwillingness to break stalemates between his aides. So as public rage mounted
over the bank bailout, David Axelrod, Robert Gibbs, and Rahm Emanuel turned to
Geithner and pleaded with him to make bank shareholders pay some price for the
government rescue of the banking sector. Geithner simply refused to yield,
making the specious argument that banks had already paid a price by being forced
to raise capital from the market. As Scheiber accurately points out, this
ignored the fact that by backstopping the banks during their self-inflicted
implosion, the US government effectively gave them an insurance policy worth
billions of dollars. In the end, Geithner won.
If Geithner is the active designer of the Wall Street bailout, Obama is the
passive enabler of Republican intransigence. Scheiber describes how, time and
time again, Obama’s reflexive search for bipartisanship handed the advantage to
the Republicans. Scheiber observes that “in Obama’s mind, ‘partisan’ equaled
‘parochial,’ or even ‘corrupt,’” leading to “making huge concessions before the
[stimulus] negotiation had even started,” that Obama’s hunger for acceptance
through bipartisanship was “deeply confused,” and, perhaps most damningly, that
in contrast to Obama’s approach, “partisan muscle-flexing may very well serve
the public interest, since there’s no other way to pass legislation.”
Timothy Geithner; drawing by John
Springs
Obama’s innate centrism led him to adopt the preoccupation with the budget
deficit of Geithner and Peter Orszag (his head of the Office of Management and
Budget and another Rubin protégé) in opposition to vocal protests from both
Summers and Romer that now was not the time to worry about deficits. As a
result, Obama would never acknowledge that the original stimulus was not big
enough, a position that left him boxed in when it became clear—as it already had
by summer of 2010, if not earlier—that it had indeed been far too small.
The low point, in Scheiber’s account, was Obama’s inept handling of the 2010
negotiations over the extension of the Bush tax cuts. His own economics team,
deeply concerned that “the president was
AWOL” on the issue,
undertook to resolve it on their own. It was Geithner and the former Clinton
political hand Gene Sperling who extracted concessions from the Republicans on
the final deal, while Obama still sought compromise. Another casualty of this
period was any real progress on debt relief for homeowners. By the end of 2010,
both Summers and Romer left Washington in frustration.
Scheiber’s book, then, is a dispiriting story both of how Wall
Street’s influence on Democrats allowed it to escape paying any appropriate
price for the mayhem it inflicted, while escaping effective regulation, and of
how Obama failed to confront intransigent Republicans. But what made the
Republicans so intransigent? That, in different ways, is the subject of two
recent books: Thomas Frank’s Pity the Billionaire and Thomas Edsall’s
The Age of Austerity.
Frank focuses on what is, as he says, “something unique in the history of
American social movements: a mass conversion to free-market theory as a response
to hard times.” It is indeed remarkable. After all, for three decades before the
financial crisis American politics and policy had been increasingly dominated by
laissez-faire ideology, by the belief that markets—and financial markets in
particular—should be allowed to run free. Then came the inevitable crash. But
far from demanding a return to stronger regulation, much of the American
electorate turned to the view that the crisis was caused by too much government
intervention, and rallied around politicians aiming to dive even deeper into the
policies that led to crisis in the first place.
How did this happen? Frank’s answer is that it was the bailouts that did it.
By doing things Geithner’s way—by bailing out the bankers without strings or
blame—the Obama administration left an understandably angry American public with
the correct sense that someone was getting away with something. And the right
proved adept at exploiting that sense. The famous February 2009 rant by
CNBC’s Rick Santelli that started the Tea Party movement was
a denunciation of
TARP, the big bank bailout passed in the
waning days of the Bush administration (although a plurality of voters believe
that it was passed under Obama). True, Santelli focused all his ire on a tiny
piece of
TARP, the planned aid for troubled homeowners (aid
that mostly never materialized), not the much bigger aid for banks. But at least
he was blaming someone, which the Obama administration was refusing to do.
And by the time Obama began, tentatively, to suggest that some bankers might
have misbehaved a bit, it was too late. The entire Republican Party and much of
the electorate had settled into a narrative in which the financial crisis of
2008—a crisis that followed fourteen years of hard-right Republican
congressional dominance and eight years in which hard-line conservatives
controlled all three branches of government—was caused by…too much government
intervention to help the poor and, especially, the nonwhite. As Frank
writes:
Back to the usual, all-purpose culprit: government…. The feds forced
banks to hand out special loans to minority borrowers…and…the entire financial
crisis was a consequence of government interference.
So the right has recast itself as the enemy of “Big Business,” not because
it’s business but because it’s insufficiently capitalist. No better proof of the
currency of that view, Frank points out, than a 2009
Forbes article by
Paul Ryan, “Down with Big Business,” where he argues, “It’s up to the American
people—innovators and entrepreneurs, small business owners…to take a stand.”
But why did the right do so much better a job than Obama and company of
seizing the moment? We’ve already seen part of the answer: Democrats in general,
and Obama in particular, were too close to Wall Street to deal effectively with
a crisis that Wall Street had created. Frank also makes an important point: in
the recent political climate, ignorance really has been strength. You might
think that the hermetic intellectual universe the right has created for itself,
a kind of alternative reality walled off from any evidence that might contradict
faith in the wonders of free markets and the evils of government intervention,
would be a liability for the
GOP. And it does indeed wreak
havoc with actual policymaking. In political terms, however, it has given
Republicans unity and certainty where Democrats have been weak and divided.
Yet where does that Republican unity really come from? Frank
doesn’t really explain this, but there’s a pretty good theory laid out in Thomas
Edsall’s The Age of Austerity. Oddly, however, it’s not the theory Edsall
himself expounds.
Edsall’s ostensible thesis, advanced at the book’s beginning, is that
scarcity is at the root of our new political battles, that we’ve entered a new
era of harsh politics because a shrinking economy and a ballooning budget
deficit make it impossible to satisfy the two parties’ political needs at the
same time:
The two major political parties are enmeshed in a death struggle to
protect the benefits and goods that flow to their respective bases, each
attempting to expropriate the resources of the other. A brutish future stands
before us.
Yet most of the evidence Edsall advances for this thesis involves pointing to
the consequences of the economic crisis—which isn’t at all a crisis of scarcity,
but rather a crisis of bad financial and macroeconomic policy. Why, exactly,
must there be a “death struggle” over resources when the US economy could,
according to Congressional Budget Office estimates, be producing an extra $900
billion worth of goods and services right now if it would only put unemployed
workers and other unused resources back to work? Why must there be a bitter
struggle over the budget when the US government, while admittedly running large
deficits, remains able to borrow at the lowest interest rates in history?
The truth is that the austerity Edsall emphasizes is more the result than the
cause of our embittered politics. We have a depressed economy in large part
because Republicans have blocked almost every Obama initiative designed to
create jobs, even refusing to confirm Obama nominees to the board of the Federal
Reserve. (
MIT’s Peter Diamond, a Nobel laureate, was rejected
as lacking sufficient qualifications.) We have a huge battle over deficits, not
because deficits actually pose an immediate problem, but because conservatives
have found deficit hysteria a useful way to attack social programs.
So where does the embittered politics come from? Edsall himself supplies much
of the answer. Namely, what he portrays is a Republican Party that has been
radicalized not by a struggle over resources—tax rates on the wealthy are lower
than they have been in generations—but by fear of losing its political grip as
the nation changes. The most striking part of
The Age of Austerity, at
least as we read it, was the chapter misleadingly titled “The Economics of
Immigration.” The chapter doesn’t actually say much about the economics of
immigration; what it does, instead, is document the extent to which immigrants
and their children are, literally, changing the face of the American
electorate.
As Edsall concedes, this changing face of the electorate has had the effect
of radicalizing the
GOP. “For whites with a conservative
bent,” he writes—and isn’t that the very definition of the Republican base?—
the shift to a majority-minority nation [i.e., a nation in which
minorities will make up the majority] will strengthen the already widely held
view that programs benefiting the poor are transferring their taxpayer dollars
to minority recipients, from first whites to blacks and now to “browns.”
And that’s the message of Rick Santelli’s rant, right there.
Now, the
GOP could in principle have responded to these
changes by trying to redefine itself away from being the party of white people.
Instead, Edsall writes, the response has been to “gamble that the
GOP can continue to win as a white party despite the growing
strength of the minority vote.” And that means a strategy of radical,
no-holds-barred confrontation over everything from immigration policy to taxes
and, of course, economic stimulus, some part of which would be paid to
minorities.
The immediate effect of this bitter confrontation has been to
paralyze economic policy in the crisis. Obama might have had a window of
opportunity in his first few months in office, but as Scheiber shows, that
window was lost—and there has been little chance of effective action since. So
the slump drags on. But as Thomas Mann and Norman Ornstein say in the title of
their new book,
It’s Even Worse Than It Looks.
* They argue that Congress—and indeed the whole American
political system—is close to complete institutional collapse. We have entered a
new politics of “hostage taking,” they tell us, epitomized by but by no means
limited to the 2011 fight over the debt ceiling. And they strongly suggest that
the ongoing fiasco of macroeconomic policy may be only the beginning.
It’s a remarkable if depressing book, especially impressive given its
provenance. Mann and Ornstein are deeply respected congressional scholars, and
their book would seem on the surface to epitomize the kind of bipartisan effort
Washington insiders claim to love: Mann is at the liberal Brookings Institution,
Ornstein at the conservative American Enterprise Institute. Yet they reject the
temptation to shade their conclusions in the name of “balance.” What the country
faces, they write, isn’t a problem with partisanship in the abstract; it’s a
problem with one party:
However awkward it may be for the traditional press and nonpartisan
analysts to acknowledge, one of the two major parties, the Republican Party, has
become an insurgent outlier—ideologically extreme; contemptuous of the inherited
social and economic policy regime; scornful of compromise; unpersuaded by
conventional understanding of facts, evidence, and science; and dismissive of
the legitimacy of its political opposition. When one party moves this far from
the center of American politics, it is extremely difficult to enact policies
responsive to the country’s most pressing challenges.
And where, in all this, is the hope that was so widespread back in 2008? It
is, frankly, hard to find. President Obama bears some of the blame for that; he
chose to listen to the wrong people, and arguably missed his best chance to turn
the economy around. (Just to be clear, this isn’t a suggestion that Mitt Romney
would do better. On the contrary, Romney is deeply committed to the false
Republican narrative about what ails our economy, and all indications are that
if he wins, he will make a bad situation much, much worse.) But ultimately the
deep problem isn’t about personalities or individual leadership, it’s about the
nation as a whole. Something has gone very wrong with America, not just its
economy, but its ability to function as a democratic nation. And it’s hard to
see when or how that wrongness will get fixed.
Blair points out that these authors signal a shift from what
David Foster Wallace called the Great Male Narcissists of the mid-twentieth
century, specifically Norman Mailer, John Updike and Philip Roth. The old guys
wrote characters who were, according to Wallace, marked by an “uncritical
celebration” of their own “radical self-absorption.” The young guys give us
self-absorbed characters, too, but they know they’re self-absorbed. Better yet,
they sort of hate themselves for it. And they’re funny about it, too.
(Underrated American writer Stephen Dixon has made his career out of such
characters for years, long before Lipsyte or Shteyngart.) But, as opposed to the
Great Male Narcissists’ creations, the new-guy characters are so quick to admit
to their own foibles and humiliations, sometimes one almost longs for a little
bravado.
