Friday, January 20, 2012

The Tragedy of Barack Obama

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.

15 comments:

Anonymous said...

It looks like Obama is playing the part of Herbert Hoover. He was elected early in what promises to be a long and somewhat blurry (partial start in 2001, more in 2008, only now is it fully underway (?)) "4th turning" and I do not expect the real steps to fix things to be done for a while yet...

Gerald Meaders said...

Professor

Many thanks. Great essay.
Covers a lot of sad bases.

Archie Bunker had wanted Herbert Hoover back, ironically enough.

I especially liked the discussion of financial institutions and politics.

I watched Michael Lewis (youtube) discussing The Big Short last year, yesterday,

and had read the book itself some time ago.

I had mentioned on my blog the offshoring of investment currently so much in the news re taxes on the 1%.

Interestingly enough, reading Krugman today, Clinton had made the most recent big pact with the devil for a child insurance program; could it have been worth a big break on capital gains (going mainly to the wealthy)?

That, sadly, has been the pattern of presidential politics, almost from the beginning, with only, say, FDR as a notable, aberrational, exception.

Ironically, even FDR was the first big free trader President of the 20th Century, I believe. (If I am wrong about that, let me stand corrected.)

All the best,
GM

Bob in NC said...

Oh Professor!
IF ONLY you had said these things 3 years ago!
Our only hope now is that a Romney administration will nakedly "capitalize" on this right-wing coup as to proke a genuine revolution of the 99%. But, can we withstand that for 4 to 8 years and retain our tenuous grasp on western civilization?

Anonymous said...

I had to chuckle over the statement about the insurance industry (there's no longer any such thing as healthcare industry in this country) making out like bandits with the Affordable Insurancecare, er Healthcare, bill. My premium went up another $200 this month; I've yet to make my deductible so they haven't made me a dime in return; inflation is under 4% and yet my premium has risen 51% since September of '07.

Please don't forget that big banks and big insurance are the same thing and have been since 1999. Insurance companies literally flooded the Series 7 prep classes in the years following Gramm-Leach-Billey.

This is all an epic disaster happening in slow motion. I have to wonder if all Crises felt this way to the participants...

Ed said...

Generally I agree with this, but I will comment on the few areas where I have differences.

First, Mitt Romney almost certainly won't be the next president. Obama's problem with the public is precisely high unemployment and to some extent Obamacare. Romney's private sector business involved loading businesses with lots of debt and firing their workers, and he was the governor who signed into law an earlier version of Obamacare. So if he is nominated by the Republicans, which is looking more doubtful now that his opponents are raising these points, they will be nominating someone with the same or worse record than Obama on precisely the issues where the public doesn't like him. Yes, there are also people who don't like Obama's race, but presumably these people had this information in 2008 and voted for his opponent, so Obama there are not enough of them to defeat Obama. His vulnerability is unemployment and to a lesser extent the healthcare legislation.

Second, when Obama started running for President in 2005-6, the big issues were the Iraq War and terrorism, essentially the Middle East. Obama promised he would withdraw from Iraq and focus on stopping Osama Bin Laden's organization. And he withdrew from Iraq and killed Bin Laden! It turned out that by the time he became president the really big issues were economics. Everything we know about Obama's background indicates that his interest and expertise are in foreign policy and constitutional law. In economics he is out of his depth.

Harper's brought out the Herbert Hoover comparison quite early in the administration, and they were prescient, but when I read about Obama I also keep thinking about Neville Chamberlain. Chamberlain had a long political career, and actually had a pretty decent record on anything that did not involve Nazi Germany. Too bad.

Ed said...

Since this blog has been focused on generational theory, could David Kaiser clarify something that has been bugging me about the blog?

Barack Obama was born in 1961. Most accounts of the Baby Boom generation that I've seen describe them as the Americans born between 1946 and 1964, and that seems to be the US Census Bureau definition (I just went to Wikipedia to check on both items). But on this blog Obama has been described before not as a Baby Boomer, which would be indicated by the standard way of doing things, but as Generation X.

Its a trivial point in many ways but its been bugging me given one of the focuses of this blog, especially as more people born in the early 60s reach high positions. How do you define who is a baby boomer?

Anonymous said...

Wow, giving up the battle while the battle lines are still being drawn. I understand your disappointment, but is it really necessary to concede defeat this early in the "game"? I don't know if you've noticed, but the Republican field is WEAK, including and especially Romney. And the Occupy movement is having an impact, despite the sickening spin from the Reich Wing. How about a little optimism, Herr Doctor?

David Kaiser said...

To begin with, it would appear that I was a little quick off the mark to give Romney the Republican nomination--I am amazed at the Gingrich revival this week. However, that certainly remains the most likely outcome.

Now Ed, you are correct that demographically, that is, in terms of numbers, the baby boom lasted until the mid-1960s. But Strauss and Howe based generations on experience, not numbers. To them a Boomer is some one who does not remember FDR but who at least dimly remembers JFK--born 1943-60. That means that a Boomer spent the first years of his life in the High, the stable, secure environment of the 1950s. That was not the experience of people born in 1961, for the most part, and it certainly wasn't the experience of Barack Obama who had a gen X environment in spades: father left home when he was 1, moved to a foreign country, mother had a second marriage and divorce, lived with his grandparents, etc., etc. Obama has said many times that he is not a Boomer and his behavior proves it. I hope this helps.

Carl Lindquist said...

Professor,

Thanks for the post. I've haven't read Suskind's book--too much to read these days--but I may go back and do so now for the details.

I agree with much that you say. To the Banking and Health Care industries, we should definitely add the Military-Industrial complex.

I have to agree with Ed that Obama seems mostly interested and skilled in foreign policy, in an almost Nixonian kind of way. I think that he has done fairly way there, in a very centrist, realist way, which may be the only (non-neocon) way it can be done these days.

I know it seems outlandish, but the notion that Obama's mom worked for the CIA--as elaborated by Wayne Marsden--and that was Obama's environment and background growing up makes some kind of crazy sense to me.

I am wondering if you think that Hillary Clinton would have done much differently in economic policy if she had won? It seems that neo-liberalism still rules the day in Democratic party circles. My guess is that she will run again in 2016.

I am so delighted to see Gingrich and Santorum raising the issue of Romney and Vulture Capitalism. How sweet it is!

Eric said...

Dr. Kaiser,
Great post. Thank you. I consider myself fairly conservative but I found myself nodding in agreement to most of your points. I have an Econ/Finance background and understand how money works pretty well. I feel there is still a ton of risk in the banking system. The financial markets don't have the protective and fail safe systems that they used to. It is a perilous journey for the individual investor today. By individual investor I mean most of us with defined contribution plans such as 401K's and IRA's. Financial risk is to be accepted, but what we are facing is integrity risk from major market players.

thomas said...

Sir,

You certainly won't find much disagreement on the left that this president's biggest failure was his administration, these confidence men, but certainly not the whole of his first 3 years can bear that label. So while he could have done more to reform the financial system, and certainly more to at least put smarter people in charge of that process, one can't ignore the fact that the economy was saved (or at least a deep recession prevented) as a result of this president.

When BO has going through this same primary process the GOPs are he made four specific promises: reforming health care, making college more affordable, ending the war in iraq (not to mention catching OBL), and doing more for energy independence. Some of those have been more successful than others, but his record is strong on all four points. Then there's the legislative accomplishments despite republican intransigence...

Middle class tax cuts
Credit card co. regulation
Unemployment insurance
CHIP
Food Safety
Tobacco Regulation
New START
9/11 Health Comp.
Repeal DADT
Fair sentencing (Pot + cocaine)
Hate crime prevention
Women in the workplace
Higher Ed Act

As Andrew Sullivan rightly pointed out this week in Newsweek, let's not forget what has been accomplished despite the attacks from all sides. His record is strong and I don't think either Newt or Mitt can hang. Would also love to hear your thoughts on Mitt's wealth + his tax rate with a historical perspective of past presidential candidates.

Anonymous said...

I was incredibly disappointed to read your pessimistic view of Obama's re-election. Do
you really think we -or our country - will be better off with any ONE of the current candidates as our president? That possibility terrifies me!

David Kaiser said...

Of course I don't believe we would be better off, but I'm trying to face what is likely to happen. I hope it doesn't.

Anonymous said...

The Obama Memos
The making of a post-post-partisan
Presidency


http://www.newyorker.com/reporting
/2012/01/30/120130fa_fact_lizza
?currentPage=all

You might find this article
enlightening.

Anonymous said...

How the U.S. Lost Out on iPhone
Work



http://www.nytimes.com/2012/01/
22/business/apple-america-and-a
-squeezed-middle-class.html?
_r=1&pagewanted=1