Monday, March 23, 2009

Inside Obama’s Economic Brain Trust

What greeted Geithner in the capital was a full-blown firestorm. Republicans were howling and screeching, calling for his head on a pike. Some Democrats privately agreed. On Wall Street, meanwhile, where Geithner’s stock has been falling precipitously for weeks, a prominent Democratic banker (and Obama backer) told me, “It’s not that everyone here thinks he should be fired. It’s just that there’s no one who would stand up right now and publicly throw their support behind him.”

He is the eye of the hurricane.

A budget session in the White House Roosevelt Room in February. From left, Gene Sperling confers with OMB director Peter Orszag as Tim Geithner talks with Larry Summers.

That Obama would defend Geithner on AIG comes as no great shock. According to the president’s chief of staff, Rahm Emanuel, Obama regards the bonus imbroglio as a “distraction” from more urgent economic priorities; his goal is to move past it and allow Geithner to get back to the business of rescuing the financial system. Yet AIG will not be so easily brushed aside, for it has brought to a boil the simmering doubts about not just Geithner but also his partner Larry Summers, director of Obama’s National Economic Council, and the economic approach they are fashioning and advancing for the administration.

It is a distraction, but it has traction, and has become an important issue. Of course, their honeymoon lasted about a week, if that long. Republicans can't figure out what to do except howl, and the IGA imbroglio has given them something specific to howl about.

When Obama appointed Geithner and Summers back in November, the reaction in Washington and on Wall Street was the same: first relief and then elation. (The day the news of Geithner’s selection leaked, the Dow rose 6.5 percent.) They were brilliant, experienced, crisis-tested, market-minded but progressive, a kind of economic-policy dream team. Since then, they have worked side by side along with Fed chair Ben Bernanke to quell an economic crisis as monstrous as any since the Great Depression—while formulating an economic agenda as ambitious as any since FDR’s. They’ve unveiled big plans, talked big talk, and crafted and shepherded into law the biggest fiscal-stimulus package in American history.

The 'market' wanted Geithner, approved of him, and a 6.5% rise is substantial. But the market is schizophrenic, and its attention span is exceedingly short.

But Obamanomics represents something even bigger than all that. At a moment when the fundamental precepts of market capitalism and government’s relationship to the economy are up for grabs, the Obamans are attempting nothing less than a redefinition of progressivism, which could alter the terms of political engagement and the ideological balance of power for decades to come. With their budget, they have laid out a vision that, as former Labor secretary Robert Reich puts it, “reverses and repudiates the economic philosophy that has dominated America since 1981.” Obamanomics isn’t merely the end of Reaganomics, in other words. It’s the end of Rubinomics, too.

Good riddance to both.

An agenda this transformative is bound to stir up criticism, and so it has—from the left and the right, Wall Street and Main Street, arch-Establishmentarians and hot-eyed populists in roughly equal measure. The complaints of these factions vary wildly, but they share a point of agreement: that the administration so far has badly mishandled the banking crisis; that it’s dithered, dawdled, and dinked around instead of delivering bold, decisive action. For Obama, confronting this issue poses a vexing dilemma. Saving the banks is the sine qua non for the country’s emergence from its ever-deepening miasma, but in doing so, Obama risks incurring a tsunami of bailout rage. If, on the other hand, he appeals too much to populism, he risks driving elites away. Either outcome could deny him the support he needs for the rest of his agenda. Getting the economics right may be devilishly difficult—but the politics are even trickier, and just as crucial.

Everybody hates it, so it must be good. And it is. It signals a new age, and it will be very difficult to get done. But it is important to get it done. The politics will be difficult. Yet I have faith in this President.

By the time you read this, in all likelihood, Geithner will finally have unveiled his plan, developed with Summers, for rescuing the banks. The stakes could not be higher. To no small extent, Obama is betting his presidency on their ability to help him pull this off. Their skills, brains, and dedication are not in question; for all the brickbats being hurled their way, they are laboring tirelessly, even heroically, against a nightmare not of their making. The question is, will that be enough?

Throughout his career—from becoming, at 28, one of the youngest tenured professors in Harvard’s history to his brief and inglorious tenure as the university’s president—much has been made of Summers’s abrasiveness and regard for his own candlepower. “Larry Summers is to humility what Madonna is to chastity,” The Wall Street Journal editorial-page editor Paul Gigot once wrote. But unlike most intellectual bulldozers, Summers enjoys people who fight back, even invites them to. He also has a fine sense of humor about himself. After reading Gigot’s gibe, Summers told his then-wife, “Well, it’s not as bad as it could have been: He could have said that I’m to chastity what Madonna is to humility."

Emphasis added, joke enjoyed.

Under the topic of could-have-been, file Geithner's selection as Treasury Secretary, rather than Summers: The decision would prove fateful. Whatever difficulties Summers might have encountered during the confirmation process, it’s hard to believe they would have been more acute—or lastingly debilitating—than the controversy that arose over Geithner’s taxes. To start with, Tom Daschle would likely have been able to survive his own l’affaire IRS. And perhaps more consequentially, the tax-compliance flyspecking that has made filling the senior posts under Geithner so difficult might have been avoided.

The passage of the stimulus package was, no doubt, a significant victory for Obama, Summers, and the rest of the economic team. But for Geithner, the triumph coincided with the start of what would be for him a long and brutal stretch. For on the same day that the Senate passed its version of the stimulus, thus essentially guaranteeing its enactment, Geithner delivered his maiden speech on the Obama plan to save the banks.

“Tim and Barack might have been able to get away with ‘Trust me on the details’—except that they were following Paulson, who asked to be trusted so many times and then changed directions that no one was going to trust any Treasury secretary on the details,” remarks a senior executive at one of Wall Street’s biggest banks. “And then here comes Tim and says, ‘Trust me on the details.’ Oy vey.”

What had happened was that Geithner, after weeks of working on the plan, changed his mind late in the game and decided to pursue a different path. Without time to craft fully the new strategy, he concluded that vagueness was preferable to providing details that might have to be altered later. One problem, though: Apparently no one told Obama.

Apparently? What kind of stuff is that? And changing his mind at the last minute? Improvising is good in jazz and football running backs and point guards, but not in steering the federal government during a financial disaster. Oy vey.

To some in the White House, the sight of the financial world turning hard against Geithner is curious, even baffling. What the Obamans thought they were getting in him was Wall Street’s guy. “They don’t get it,” says one name-brand Democratic banker. “Geithner was a $500,000-a-year guy. He was the regulator. People knew him, liked him fine, but he was never a member of the club.”

I guess he means only 500 thoussand. Pity that.

A longtime Geithner ally in Washington comes to a different conclusion. “A lot of the pushback he’s getting from Wall Street is about their lack of self-awareness about how the world has changed, how they’re not the Masters of the Universe anymore,” this person argues. “They feel marginalized and put-upon by the administration’s rhetoric about the greedy bankers. They are way behind the curve about where the public is and how much pressure the administration is feeling. They don’t like what the new environment means for how they run their business. They see their taxes going up and their compensation going down. And what they don’t do is go to the New York Times and say, ‘My feelings are hurt. I don’t like what the new president is saying about our character and our competence.’ What they say is, ‘These guys are incompetent, we need a real policy, the Treasury secretary has got an unsteady hand—he’s not up to the job.’ They’re thinking one thing and saying something quite different.”

It sure depends how you look at it; two people can arrive at two different conclusions, depending on their persepctive.

And, where is Paul Volcker in all of this?

In the worlds of finance and business, few figures are held in higher esteem than the towering, stoop-shouldered, marble-mouthed Volcker. So it has hardly gone unnoticed that he has lately seemed, ahem, less than thrilled with Team Obama.

I've noted his absence.

He has privately complained that Summers has frozen him out of the policy-making process. He has publicly criticized the sluglike pace of filling top jobs at Treasury as “shameful.” With the White House meeting, Obama had a chance to make Volcker happy—and in the process use him as a piece of photo-op arm candy, sending the message that the chairman remains standing, literally and figuratively, beside him.Was Volcker placated? Maybe only momentarily. “He wants to have a real role,” says someone who knows him. “If they’re gonna call him an Obama adviser, he wants to really advise. He has no interest in just being window dressing.”

Ah, office politics, bruised egos, intrigue.

Even (or especially) absent details, nobody has the faintest clue whether the plan will work. But everyone believes that, even if it does, the cost will be stratospherically high—likely upwards of $1 trillion, comprised of the $250 billion still in the kitty from Paulson’s original tarp program plus the $750 billion that the Obama budget warned Congress might be needed. The problem, politically speaking, is that the public appetite for ponying up for further bailouts is small and shrinking by the day, thanks in no small part to the depredations undertaken by AIG.

The AIG imbroglio cost Barack Obama a lot of political capital. A lot. The political will to undertake significant efforts to solve the financial crisis is dwindling, with the Republicans working to whittle it further.

The only way that the electorate is going to sign on to the level of spending necessary to keep the financial system from imploding is if there is some tangible upside for the taxpayer—as opposed to the current bailout paradigm, which Krugman refers to as “lemon socialism: Banks get the upside, but taxpayers bear the risks.”

Krugman doesn't like a lot of things. That doesn't mean he's wrong, but he is a sour puss.

There are those who believe that the administration grasps the point perfectly well. That nationalization is where it’s headed, slowly but surely. That the stress tests are really just a backdoor way into temporary government ownership of the current zombie banks—a means of providing a sense of order, consistency, and due process necessary to make nationalization seem an empirically based act of last resort.

Some have forecast nationalization, including Dr. Doom.

“All I can tell you,” says one administration official, “is that Larry seems quite happy with this part of the policy portfolio being known as the Geithner Plan.”

More office intrigue.

The truth, in the end, is that whatever emerges will be perceived as the Obama plan. And the president is apparently deeply uncomfortable with nationalization.

Not a socialist? How about that.

Two months into the Obama era, however, it’s hard to detect many traces of the Rubin doctrine in what the new president and his people have done or are planning to do in the future. The administration proposes to run a $1.17 trillion deficit in 2010. It intends to reregulate the financial industry. The reduction of income inequality is at the core of its tax and spending proposals. Its budget plan reflects “the largest commitment [to public investment] in 40 years,” notes Bob Reich. And it imagines a level of direct government involvement in the market (and particularly in the banking sector, nationalization or no) that would have Rubin spinning in his grave—if he weren’t still kicking, that is.

A variation on Ralph Kiner's phrase.

The balancing act that Obama must therefore pull off is a hell of a party trick. He must court the elites without pissing off the masses and soothe and provide catharsis for the masses without alienating the elites. His political advisers, seeing his poll numbers beginning to slip, are applying their war paint and preparing to do what they do best: pick a fight with the Republicans. (Rush Limbaugh, anyone?) But however tempting this might be, Obama would do well to rein them in. Not because there’s any inherent virtue in bi-partisanship or kowtowing to Republicans. But because picking fights during a national crisis looks small, unserious, and faintly oblivious to the severity and significance of what’s occurring around us.

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