It began back with candidate Obama’s choice of the neoliberal Robert Rubin as his principal economic adviser for his campaign. Rubin had been Treasury Secretary under Clinton and was one of the architects of the deregulation that laid the foundations for the 2008 financial meltdown. He went on to a cushy, OK very cushy, job at Citigroup where his connections earned him more than a $100 million. Nice work if you can get it.
Then in mid-September 2008, with the Presidential campaign in full swing, Treasury Secretary Paulson decided to let Lehman go bust without really giving any thought to what the fallout from this would be. Money markets, which were an integral part of the financial world’s credit machinery involved heavily in short term lending, held a lot of Lehman bonds. They panicked and stopped lending and credit froze overnight. Less than a week later Paulson came to Congress with a 3 page “plan”, the substance of which was “Give me $700 billion and no questions asked, or your economy dies.” Paulson intended to use the money to bail out the banks buying up their crap assets through a reverse auction, an idea that even at the time sounded preposterous.
Despite this, Obama used his considerable clout as the Democratic Presidential nominee to get the Paulson plan passed. Almost immediately it became obvious that the reverse auction was, as critics had warned, unworkable. Instead using a minor provision in the bill Paulson made direct cash injections into the banks. This was an idea that had merit but Paulson completely flubbed the execution, giving the banks money and getting virtually nothing in return. It was $350 billion, which Obama had signed off on, down the drain. Because this was a bipartisan clusterfuck, all sides agreed that while it did not accomplish any of its goals, it still somehow saved the banking system. And therefore, rather dubiously, it was better than nothing. Of course, a latte from Starbucks is also better than nothing and so we could make the same argument for it. What the Paulson plan never was was better than a program which would have traded money to the banks in exchange for a voting stake in the companies, a change in leadership, help for homeowners, a real audit of the books, and a re-initiation of normal lending (in other words what a nationalization by whatever name it was called would have done).
Within a couple weeks of Obama’s election victory, Citigroup began experiencing severe financial problems and Rubin’s star position in the Obama organization went into eclipse. His role was taken over by his protégé Larry Summers who followed him as Treasury Secretary under Clinton, and Timothy Geithner, a protégé of both Rubin and Summers. Summers like Rubin had done much under Clinton to lay the groundwork for the meltdown. Geithner who took up his position at the New York Fed in 2003 managed not to see the housing bubble in advance. In the run up to and even after the financial meltdown hit, he continued to do nothing except help Paulson structure sweetheart deals for the likes of JPMorgan with Bear Stearns and Goldman Sachs with AIG.
These are two guys that no one who was remotely serious about fixing the banking system would let anywhere near the place. Nevertheless, Obama made Summers his chief economic advisor. His personality was too toxic to get Senate approval to head Treasury. The less well known Geithner was tapped for the Treasury post.
Now while all this was going on the economy continued to tank. What looked like a really bad recession took on more and more the tones of a depression. It was important to act quickly and decisively. While Obama and his team did act quickly, they acted anything but decisively.
The first part of their plan was an economic stimulus. Their original proposal was too small and poorly structured and was weakened even further by “cost cutting” pro-tax cut Republicans and Blue Dog Democrats. The result was a $787 billion 2 year stimulus which was about half the size it needed to be, had too many tax cuts with little stimulative value, and would create only about a third of the jobs needed.
The second part of the Obama program was a program to help the banks. Like the Bush-Paulson responses, it dwarfed aid to the real economy with a price tag of $2 trillion. Its rollout by Timothy Geithner was an astonishing embarrassment. It made Paulson’s 3 pager seem like War and Peace in comparison. It contained a bogus stress test for banks and then a trillion dollars in government backing for a buy out of their crap assets by hedge funds. Another trillion was earmarked not for direct credit but for the secondary securitized instruments. No one including Geithner knew what he was talking about.
Part 3 of the Obama economic plan addressed the largely forgotten plight of homeowners. It was also the smallest at $75 billion with another $200 billion set aside for the buy up of higher quality mortgages which met Fannie and Freddie standards. The program did not reduce the principal on mortgages but did seek to give better terms on interest rates and length of mortgage with a view to reduce payments. The program would help some homeowners but not most of those with subprime loans or those with upside down mortgages.
In brief, the Obama plan was made up of a stimulus and a mortgage relief program, both of which were far too small, and a second bank bailout TARP II that made no sense to anyone.
And just this last week Obama reiterated his position that bank nationalization was off the table even as the share price of major banks like Citigroup and Bank of America cratered.
Yet even as the country faced its worst economic crisis since the Great Depression and even as Obama addressed it with programs that fell well short of what was needed, still his administration had time to go off on dangerous tangents.
A depression is a recession plus deflation. We were entering depression even as Obama was inaugurated. He had a chance to push out of it but he did too little. Basically, to get out of a depression you have to spend your way out . Spending creates jobs and those who have jobs create demand and this soaks up the excess supply which created the deflation and the recession.
The one thing you don’t want to do is anything that might cause spending to decrease. Yet this is precisely what Obama has done with two completely superfluous economic detours. The first of these was a plan put forward by Obama’s head of the Office of Management and Budget (OMB) Peter Orszag to increase the retirement age and reduce benefits for Social Security recipients. Now current and soon to be receivers of Social Security would be unaffected but what were they thinking? The country is going into depression and they want to scare retirees (and possibly cause them to hoard what little they have) and tinker with a program that won’t need adjustments for years. On top of that Orszag came up with this plan in 2003 and most of his assumptions were based on an economy very different from the current or likely any future one.
Then Obama announced that he would cut in half the government’s budget deficit by the end of his first term. Now in ordinary economic times such a goal would be laudable but these are not ordinary times. The government and Obama need to commit to spending, and even big spending, until the crisis is over. It is like drowning. You need to commit the energy it will take to keep your head above water. You do not say, “I will do what is necessary to keep my head above water for 10 minutes but then I will cut my efforts back by half.” You stop making the effort required. You drown.
There is just no reason to make such an announcement now. As with the Orszag plan, silence would have been preferable. Looking back on Obama’s developing economic record, some things are becoming quite clear. Obama does not know much about economics, and he is getting terrible advice. Nor does he have close control over people or plans. If a Geithner can announce a multi-trillion plan that is so devoid of content that it reads like a bad joke or that an Orszag can bring up entitlement reform based on an outdated plan when there are so many other pressing issues to confront, then somebody is asleep at the switch. Worse looking at what Obama has offered so far to address the crisis and his plans to trim deficits, both he and his economic team remain in denial about how serious and deep the country’s economic problems are. They are not alone in this. The Congress and media also seem to be whistling by the graveyard.
Yet there is something schizophrenic too about their reaction. Spending about $400 billion a year for a couple of years to support the real economy is what you might expect in response to a moderate recession, not the serious depression we are facing. At the same time, trillions with no real oversight or plan continue to be dedicated to a paper economy that has definitively collapsed. What this suggests to me is confusion, and decisions that are being dictated by politics and ideology, not economics and reality.
We are seeing a variety of programs from the Administration. They are too small, poorly structured, big but misdirected, irrelevant, won’t work, etc. –everything but what we need. None of this had to happen from the housing bubble to the financial meltdown to the depression but it is because our political, economic, and media elites simply refuse to believe what is happening (something they can do because they are insulated from the worst effects), or that they are responsible for creating it. And they, and Obama, lack the integrity and intellectual smarts to do what is needed to stop the downward spiral no matter how bad it gets. So far the Obama economic record is an F.