Three years ago, I, like so many others, felt myself fill with hope as Barack Obama was inaugurated as President, with large Democratic majorities to work with. By then I should have known better. The appointment of Larry Summers, whose path had already crossed mine and whose disastrous tenure as President of Harvard should have ruled him out of any further major responsibility, was such a shock that I went, literally, into denial over it. It was not until 18 months later, on July 4, 2010, right here, that I recognized that things had not, and probably would not, turn out as so many of us had hoped. And now we have the story, in broad lines at least, of how that happened, courtesy of Ron Suskind, the author of Confidence Men, which appeared a few months ago. The newspapers reported at the time that the book had sent the White House into a bit of a panic, and I can see why. Their campaign to reduce its impact to negligible proportions evidently succeeded. To be sure, it is very long and sometimes tedious, but the length serves the purpose of genuinely immersing the reader in the subject at hand. (I have used the same technique myself more than once.) And yes, like Woodward's books, it relies on a number of key sources, although Suskind does not make any effort to disguise who they were. I'm sure I could write 5000 words about it, but I don't have the time to do so, and thus I shall begin, as it were, not at the beginning, but with my own conclusion, based upon his facts.
We will never know what another Democratic President might have done with the opportunity of January 2009, and it is not certain that anyone could have done that much more. Neither Obama nor anyone else could match the enthusiasm that had swept him into office with an army of reformers ready to recreate the American economy. That is the result of 30 years of almost unchallenged free market orthodoxy and tax cuts on the very wealthy. In Obama's case, however, the story is very clear. While he was open to radical steps such as a government take-over of at least one major bank, he was not committed to them. And the appointments of Summers, Tim Geithner and Rahm Emmanuel ensured, in retrospect, that nothing fundamental would happen. Summers was a major architect of the deregulation of the financial sector, and nothing, including the loss of 30% of the Harvard Endowment and the economic collapse of 2008, could persuade him that he had made any major mistakes. Geithner as chief of the New York Fed had worked to insure the continued health of the big banks and continued to do so after becoming Treasury Secretary. Emmanuel, I must admit, emerged as the most contemptible type of all: a Democratic politician who evidently believes that Democratic politicians can remain in power only if they carefully avoid rocking any big boats. Together they were a disastrous triumvirate.
"First do no harm" was Geithner's and Summers's motto in dealing with Citigroup, Bank of America and the rest--and that Hippocratic metaphor says it all. To them the banks were the patients. To other Americans, including the venerable Paul Volcker, who figures memorably in the book, a few other aging veterans of the distant past, and Paul Krugman, the patient was the economy and society of the United States, and the big banks were a cancer that had to be excised to restore the patient's health. Obama is a compromiser and no compromise is possible between those two points of view. The banks won. And the banks, Suskind shows again and again, do not make any pretense of having our interests at heart. The slow recovery has revolved, at least in part, around their refusal to lend money within the United States--but as long as more profitable opportunities exist there is not the slightest reason to think that they might do so. In one of the most devastating moments of the book, Suskind quotes an anonymous banker as saying that he and his colleagues are going long on the developing world, where growth is occurring, and short on the United States. That's more than a metaphor: Mitt Romney, among others, bought several corporations with the goal of loading them up with debt and putting them out of business. Even Herbert Hoover, faced with a similar situation, started the Reconstruction Finance Corporation, which became a key institution both during the New Deal and in the Second World War. No such proposal has emanated from Washington now.
I could write pages and pages about what I learned about the financial world from this book, but I will content myself with two more topics: the regulation of derivatives, and banks' relationships with their customers. It has long been accepted that transparency and collateral are the keys to successful markets, and the whole New Deal regulatory structure was designed to bring these virtues to trading on Wall Street. For two years, Wall Street, with help from Summers and Geithner, struggled to prevent any regulation of derivatives, such as forcing them to be traded on public exchanges, with trades settled through clearinghouses. They did not completely keep such provisions out of the Dodd Frank bill, but they hedged them sufficiently as to make them, in all probability, ineffective. Why? Because it is precisely the lack of transparency in these transactions--the inability of buyers and sellers instantly to find out what the other is asking or bidding--that makes them so enormously profitable for the banks. Playing with rules is less profitable (at least in good times!) than playing without them, and two generations of graduates of our elite universities have now learned in their economics courses that profit trumps all. When they reach Wall Street, as so many of them do, that view is reinforced.
As for banks and their customers, Goldman Sachs has, as you probably remember, been sued by the SEC for having sold their customers subprime collateralized debt obligations that they knew hedge fund trader John Paulsen was shorting--and even accepting his help in deciding which mortgages to put into them. That, once again, was simply doing what comes naturally in the modern world. The complaint has not yet been settled, and it will be interesting to see how it turns out. But unless and until the banks are fundamentally restructured and their income reduced, they will remain dangerous parasites on our system.
Another fascinating fact Suskind expounded concerned "repo" money--funds which the big firms lent one another on a temporary basis to keep their operations going. His account reminded me of one of my father's favorite (though not one of his better) jokes, about a guy who borrowed $100 every other Friday from Farbstein to pay Ginsburg, and borrowed it back from Ginsburg the next Friday to pay Farbstein. I must have heard this story for the first time before I was ten, but I could see there was a problem with the scheme. But this was, apparently, the way the big firms operated, and may still be, to the tune of many millions of dollars. They managed their liquidity on a minute-to-minute basis. It's no wonder so many of them had a weakness for cocaine and paid sex.
As for health care, two issues dominated the debate: the expansion of coverage, and the reform of medical practices, using the best available data substantially to decrease the amount of money spent on health care. As I have already described here, Karen Ignagni, the health insurers' chief lobbyist in Washington, made sure early that the health care bill would include a mandate, a gift to her industry of millions of largely healthy customers. But while the bill made its way through Congress, any large-scale cost control efforts dropped out of it, partly because of Republican "death panel" propaganda. I spent last weekend in the company of a number of conservatives arguing that Obamacare was unconstitutional. I don't think that it is, but I wished I could have been defending a proposal that I believed would do some good. And that leads me to the real heart of the matter.
We are in serious trouble in the United States because the financial community and the health care industry soak up much, much too much of the Gross Domestic Product. Real reform means much less money for them--and they are not going to surrender it gladly. Roosevelt made it possible for industrial workers to get more of their firms' revenues in wages, he saved many, many farmers from foreclosure, and he tried (with how much success I am not sure) to take away some of the power of the energy industry, composed then of power companies. He knew many within these institutions would hate him for this, and he didn't care. In fact, he was proud of it, and he should have been.
Barack Obama is simply not capable of taking such a stand. Roosevelt, who met the President of the United States when he was about five years old, was an insider from the day of his birth. Obama was an outsider at least until he reached Harvard Law School, and he has gotten where he has by working with the system. Nothing has ever happened to him--except, evidently, an unfortunate lease he signed for a car, and perhaps some excessive credit card spending--to make him fundamentally distrust our institutions, or, even more importantly, the kind of men who tend to rise to the top within them and look after each other. The women in the White House, Suskind shows, consistently felt ignored and unheard. I'm sure that was true, but I'm not sure it was because they were women--I doubt very much that men who disagreed with Larry Summers and Rahm Emmanuel would have got more of a hearing. They should be proud to have been ignored for their views, rather than resentful of having been ignored because they were women.
Because they had the wrong priorities, the men in the White House have probably sunk their Administration. (The book ends with a big management shake-up after the midterms but it doesn't seem to have done much good. The new chief of staff, William Daley, lasted only a year.) They obviously had to do more to put people to work, but when that became clear in the middle of 2009, Emmanuel shut off discussion by saying that nothing more could go through Congress. (I am not even sure that is true--it could certainly have gone through the House, whose Democratic members paid the price for their President's pusillanimity in November 2010.) Even before that they had not taken enough trouble to make sure the trillion-dollar stimulus would go where it was most needed. It did not have to be their last chance.
In the next ten months Barack Obama will have to endure the most overwhelmingly hostile volley of propaganda that any sitting President has faced in an election since Herbert Hoover. Sadly, he will have no real achievements to show for it. Health Care reform was simply not the place to put his priorities in the midst of an economic crisis, even if he could have passed a good bill. The President has retreated from New Deal liberalism, as Bill Clinton also did, in a thousand ways. He cannot accomplish anything substantial domestically in the coming year and he may suffer the indignity of having his health care law declared unconstitutional. With Mitt Romney virtually assured of the Republican nomination, he is likely, as of this moment, to be President one year from today as well. The President, sadly, will have no one to blame but himself.