Barack Obama, The Departure of Larry Summers, Voter Anger and the Bailouts

So Larry Summers is out. From the Obama economic team, Peter Orszag and Christina Romer  preceded him. This looks to be a wholesale turnover at the top given the departures of Axelrod and Emanuel on the policy side as well.

So now might be a good time to recount what happened early in the Obama termregarding the bailouts, regulation and so on that ultimately led to voter anger, undermining President Obama’s change mantel as he moved to his social agenda of healthcare.

Campaigning as Change Agent

When Barack Obama campaigned as a presidential candidate, he was famously billed as "change you can believe in." It was this selling point which won him the oval office despite his relative inexperience. In fact, one might say his relative lack of inside the beltway experience was a plus for many American voters.

But what kind of change was Obama ready to deliver? No one knew. Here are two possibilities:

  1. A change in tone i.e. a move to bipartisanship with the President reaching out to the other party to join forces with the Republicans in tackling the country’s major economic and social problems.
  2. A change in substance i.e. a move to re-align the national political agenda toward priorities of greatest concern to the American middle class and away from the concerns of special interests.

Picking Insiders

In retrospect, it is clear that the Obama ‘change’ at the White House prioritized possibility #1 over possibility #2. For example, if you want wholesale change, you select more outsiders as Bill Clinton had done in 1992. But, you risk political errors due to inexperience. When it came to selecting a cabinet, Obama chose insiders with deep Washington connections: Clinton, Geithner, Summers, Orszag, Vilsack, Richardson, Daschle, Biden. But insiders are unlikely to move wholesale toward a new political agenda and most likely to defend their own previous (misguided) policy actions.

In November 2008, I wrote:

The tag line from the Obama campaign was “Change We Can Believe In.” However, an increasing number of people are becoming skeptical as to whether Obama will actually change anything.

I, for one, have always felt his cautious approach meant incremental change as opposed to wholesale change. And that is a good thing. Nevertheless, as the glow of election politics wears off and the job of governing looms, many progressive Obama supporters are seeing signs that he is not the change agent they want him to be.

First, there was the pick of political insider Rahm Emanuel, as his chief of staff. Nicknamed Rahmbo, Emanuel was a major force inside the Clinton Administration and is a Congressional Representative from the state of Illinois.

Now, it seems ever more likely that Obama has come under the influence of laissez-faire free market deregulators from the Clinton days. Many must, therefore, wonder if he is ready to reform Wall Street.

Is Obama really “Change we can believe in?”

My own view at the time was ‘yes, I am sceptical but let’s give the guy a chance.’ I was concerned, however.

As a finance guy, I am hopeful that the Geithner appointment will prove to be the right one given how questionable Hank Paulson’s judgment calls have been during the crisis. However, it does concern me that he was very much a factor in the Lehman, Bear Stearns and AIG crises where the Government didn’t exactly knock the ball out of the park. I am going to leave my comments at that. For a different view, take a look at what Yves Smith has to say about this.

Oh, and by the way, the market really rallied on the Geithner pick, ending up 6 1/2%. Does that mean anything, though?

Geithner is the man at Treasury, Richardson and Clinton also in, Nov 2008

Making Tough Policy Choices

Last night, I was reminded of the kind of tough choices Mr Obama had to make because of this article that Brad DeLong linked to yesterday: Obama to coddle bankers « LBO News from Doug Henwood.

The Henwood piece referenced a New York Times article from February 2009 "Geithner Said to Have Prevailed on the Bailout" which in retrospect is a tour-de-force piece of journalism. It spells out 100% what was happening in the Obama White House early in the President’s term.

Here’s what you need to know:

The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

In short, the Obama Administration was faced with the choice of sweeping change in the financial services industry (pre-privatization, compensation limits, etc) or a more industry-friendly line (bailouts, cheap lending, public private partnerships, etc) and it chose the industry-friendly approach largely in line with the approach of the predecessor Bush Administration.

What do I make of this?

  1. Obama actively chose to side with Tim Geithner over others in his administration. If you look at who has resigned office in the Obama Administration, it is no coincidence in my view that those who lost these early political battles are out and Tim Geithner remains.
  2. The reason the President sided with Geithner is ideological. One must assume that Larry Summers, David Axelrod, Christina Romer, Paul Volcker and others made forceful cases for their preferred policy options because none are shrinking violets. Yet, time and again Geithner prevailed. Why? The only logical conclusion is that the president agreed with him, plain and simple.
  3. Obama believed this plan would work. In conjunction with the stimulus package the President must have felt confident that his bailout approach would turn the economy around. Clearly, his approach was more cautious and risked his being seen as ‘more of the same.’ If he were truly concerned that the economy would continue to suffer or that by 2010 people would be discussing a double dip, I imagine he would have taken bolder remedies.

The quote that comes to mind which most epitomises the Geithner-Obama mentality is this one from Secretary Geithner last December:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives. We’ll be judged on how we dealt with the things that were broken in the country. We broke the back of the worst financial panic in three generations, more effectively and at a much lower cost than I think anybody thought was possible.

In my view, the President has erred. His approach of seeking change via bipartisanship was met with resistance within the Republican party and his cautious approach to the financial services industry backfired when the industry recovered, paying record bonuses again without increasing lending enough to buoy the economy via credit growth.

Ironically, having realized his error late in 2009, the President changed tack in referring to bankers as ‘fat cats.’ This too backfired as bankers led business leaders in an attack on the President’s pro-business bona fides despite his having sided with Geithner’s more industry-friendly approach. The President is now trying to re-create the magic with business via pro-business appointments.

And no, you do not have to do "things that are deeply unpopular, deeply hard to understand." There’s an arrogance in this statement. it’s as if Secretary Geithner is saying the elites know what to do and the people are uninformed. Their opinion doesn’t matter. We, as better-informed elites, must decide for them.

I would go further. The reason the President lost his change mantel and came to be seen as a ‘socialist’ was two fold:

  1. People sense the arrogance behind "deeply unpopular, deeply hard to understand." The Obama administration is getting it from the left and the right. Much of this has to do with the economy. But people also see the best and the brightest mentality at work in the Obama Administration – the viewpoint that says we know better than you. That’s what the bailouts were all about. And that is off-putting. It is condescending and demoralizing. This is why the "Professional Left" is apoplectic. This is why the Tea Party is raising a ruckus.
  2. The economy has been awful. The negative reactions to the NBER’s declaration that the economy ended 15 months ago tells you that. If the economy were better, Obama would have received more leeway on other aspects of his legislative agenda (like healthcare), both on the left and the right.

That’s where I am on the politics of the economy. Re-reading the NYTimes article is what prompted this post because it really put the whole cabinet re-shuffle in perspective for me. I am sure many of you have a different opinion. And I hope you will lay it out for us in the comments.

  1. Mike says

    From Mike:

    Ed, as usual, I could not agree with you more. Mr. Obama took the path of “I know better”, and failed to work hard at developing a strong bi-partsian approach. As a result, he alienated the centrists, like myself, who believed he would take a good shot at making us purple.

    Well, he lost my vote.

    And the arrogance of Geithner is ridiculous. Like we can’t understand what is going on. I fail to see how someone, who can’t accurately complete their tax return, somehow is smarter than I am. He’s just a liar plain and simple.

  2. Quad says

    How could he trust Geithner so much when this was the Wall Street regulator who was so busy protecting the old boys network that he allowed the system to melt down? I just don’t get it. Why is he the last man standing?

  3. Element says

    Another “Change We Need” for sure Edward, but you’re still stuck with Ben, and I would argue he’s a fundamental problem in himself; i.e.

    Ben’s ‘flation’ Confusion:

    I’ve quoted several comments from last month’s Jackson Hole speech on August 27, because they deviate significantly from the new expectation that emerged just last week;

    “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate” – Ben Bernanke, Sept 21 2010

    People are thus presuming the US Fed has indicated it wants to commence a QEII program as it suddenly thinks inflation is too low, and as it can not lower rates any more to stimulate, it must use quasi-‘fiscal’ printing to expand its asset book. The AUD shot up, the USD shot down, and the Yen, Euro and Pound sank, even faster than the USD, while Gold shot to a new all-time nominal record .. then the Yen rose again. Doh!

    But look at what Ben said about 3.5 weeks prior (my CAPS).

    “… However, such a strategy is inappropriate for the United States in current circumstances. Inflation expectations appear reasonably well-anchored, and both inflation expectations and ACTUAL INFLATION REMAIN WITHIN A RANGE CONSISTENT WITH PRICE STABILITY. …” – Ben Bernanke, Jackson Hole, August 27, 2010


    “… First, the FOMC will strongly resist deviations from price stability in the downward direction. FALLING INTO DEFLATION IS NOT A SIGNIFICANT RISK FOR THE UNITED STATES AT THIS TIME, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation. It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.” – Ben Bernanke, Jackson Hole, August 27, 2010

    And that would cause Ben to do something, because;


    So at the beginning Ben first says; look, we don’t have a deflation problem, at all, and we don’t expect to have one soon. Then only 3.5 weeks later he says; er, excuse me guys, Hi! It’s me again and er, I think I might in fact be measuring the opposite of inflation, after all.


    “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate” – Ben Bernanke, Sept 21 2010

    So, you’ve got to ask, what’s changed so much in the past 3.5 weeks to result in this contradictory communication?

    It’s simple. The danger is not deflation, per-sec, its; “… Because a further significant weakening in the economic outlook would likely be associated with further disinflation …” – Ben Bernanke, Jackson Hole, August 27, 2010

    So the real message, the real problem, is that the Ben and the FOMC now accept that the economy is weaker, and weakening, and will keep weakening, and is likely to lead to two-for-the-price-of-one retail car sale deals again, per early 2009, if it continues.

    And yet, Ben said in the Jackson Hole Speech;

    “…A potential drawback of using the FOMC’s post-meeting statement to influence market expectations is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee’s policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communication strategy, with the goal of communicating its outlook and policy intentions as clearly as possible. …” – Ben Bernanke, Jackson Hole, August 27, 2010

    Let’s call that strike one.

    But now it gets interesting. People are chomping at the bit over the prospect of QEII bucks flowing into equities hence DOW ~10,840 surge. But your Govt just enacted Fin-Reg to eliminate bailouts for the banks. Obama made that fairly adamantly clear didn’t he?


    Ben begs to differ here, as the FOMC’s first of four future policy tools/options, in the event of further ongoing crisis is;

    “… A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities. …”

    i.e. a bailout of Banks and Agency Debt – get it?

    And if you read all 4 ‘future’ policy tools and options that he discussed on Aug 27;

    “… (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists–namely, that the FOMC increase its inflation goals. …” – Ben Bernanke, Jackson Hole, August 27, 2010

    Well, let’s face it, options (3) and (4) are out, and (2) does not seem to function properly. Leaving option (1), bail everyone out again.

    And as I pointed out, in a comment within; “Soros explains his comments on gold as the ultimate bubble” – Edward Harrison – September 15, 2010

    This FOMC policy option (1) is going to be a serious problem. So I would not be in a hurry to see QEII bucks being unleashed.

    I would also point out that QEI occurred ONLY due to the inescapable emergency requirement (so we’re assured) to buy enough toxic-debts off enough core Bank balance sheets to convince the > BANKERS < that the TBTFs would not be allowed to fail.

    Thus bring down the whole global banking system … yada-yada-yada.

    So I'm 100% convinced that when you see QEII it will be directed towards the same ends, because as zerohedge made lucidly clear last week, both US Mutual Funds and also US ETFs are seeing a 5-month old NET outflow of several billion USD per week from the US markets. On top of this, "The Great Deleveraging Lie" pasted at FSU in August makes it perfectly clear that the credit binge has kept rising since Sept 2008 and that as quickly as the US Banks cleared off $300 billion USD in bad debt, the US private sector concurrently acquired $500 billion USD MORE that went bad! (in new loans and refinancing)

    Oh yes, … there will be blood.

    So Ben now knows that if he does not buy debts and a lot of it — A LOT OF IT!!! — then 2008's QEI was for naught anyway, because the banking system is now not just back where it started, but the economic, financial and business environments are now many times worse than they were in May 2008, in virtually every significant respect.

    This used to be called 'painting-yourself-into-a-corner'.

    (never happens if you pay attention and know what you're actually doing)


    "Summarizing 2010 ETF Outflows", Tyler Durden, Sept 17 2010, at

    "The Great Deleveraging Lie", James Quinn, Aug 26 2010, at Financial Sense University

    1. Edward Harrison says

      I agree with your read of Bernanke. He is more concerned about a double dip
      now than deflation. And the Fed wants to stay as apolitical as possible.
      Bernanke obviously believes the Fed had the tools to stop deflation – I
      dont’ -but he doesn’t want to use them until the legislative branch has had
      its go.

      Edward Harrison
      Sent from my mobile phone

  4. Saul says

    I agree with your analysis, but I don’t see the relevance of this statement: “And no, you do not have to do “things that are deeply unpopular, deeply hard to understand.” There’s an arrogance in this statement. it’s as if Secretary Geithner is saying the elites know what to do and the people are uninformed. Their opinion doesn’t matter. We, as better-informed elites, must decide for them.”

    Isn’t this exactly how our government operates? We choose representatives who are better informed/educated/experienced then ourselves and trust them at times to make the unpopular or hard decision. I don’t see anything elitist in this statement at all, nor do I see the relevance to your overall argument.

    1. Edward Harrison says

      Saul, my view is that government officials are elected to represent us. I
      don’t want someone doing things on my behalf in direct contradiction to my
      views because I believe them to be more informed. I want government to carry
      out the will of the people. And to the degree that politicians are better
      informed – something I do not believe, they should then have the ability to
      execute the will of the people in an informed way.

      Edward Harrison
      Sent from my mobile phone

    2. Edward Harrison says

      Now that I can type in full, I would add that the legitimate reason government might do things that are deeply unpopular is because a large plurality of voters want them to do. Michael Gerson put the problem well in the Post today. He writes:

      “The tension here is obvious. Even while depicting Washington as a flawed, fractured, hopeless mess, the Obama administration has sought to increase the influence of Washington over America’s economy and health-care system. In the Obama era, Washington helps run auto companies, oversees some corporate salaries, imposes an individual mandate to purchase health insurance, and seeks to rationalize the health-care system with a profusion of new boards, offices, agencies and commissions — estimates vary from 47 to 159 new bureaucratic entities.

      Progressives would object that it is political Washington — the paralyzed structure of legislators and special interests — that is broken, not bureaucratic Washington, which needs more authority. But it is not easy to argue that citizens aggregated in a legislature are self-interested, corrupt and incompetent while citizens aggregated in a government agency are public-spirited, wise and effective. And it is not much of a communications strategy to feed disdain for politics while proposing an expanded role for government.”

      If the Obama Administration had been effective in reducing unemployment and engineering a V-shaped recovery, I think it would have been given a pass on many of its initiatives. The arguments Gerson makes -many of which I agree with – would have much less importance. But it has not stopped the bleeding, and, therefore, the role of government has come into question and his arguments take on a different flavour.

      This is how I put it earlier:

      “If you think about the tea-party movement’s anti-government angle, it is loosely based on the sentiments expressed here of a government moving down the slippery slope into kleptocrat territory. The same is true again from the populist left.”

      The source of anger is the same on the left and the right in my view. It is about a middle class squeeze, an entrenchment of special interests and a kleptocracy. The difference between the tea party and the populist left has to do with their framing i.e big versus small government.

      And when you are saying that you want government to make deeply unpopular choices that go against the will of the people – that is more in line with what some progressives or big government types believe. But you then run into the type of contradictions that Gerson writes about “how can you argue Washington is a mess and then ask for greater Washington influence?

  5. Scott says

    Hi Ed:

    I have been at odds with your recent Clinton posts because I thought they simplified the problem and misrepresented the plight of the Tea Partiers. I am not a Tea Partier. I think the litmus test for the activists comes when they have to decide whether or not they are willing to give up their Social Security and Medicare in the name of what they are fighting for. My guess is they are not willing to give up benefits, but are willing to slash others’ benefits only which make it a lost cause. For this reason, I’ve felt you’ve overlooked a key point on voter anger when you corral all libetarian minded people into the Tea Party. Some don’t want anything, they just hate misrepresentations and would rather have less than more government.

    To get to your post, your final point 1 describes better what I am feeling. If TARP, AIG and Bear Sterns are the events in consideration, Obama does not even really factor in. You are correct that he did not extricate himself from that stuff, but as you say nothing has changed. That’s what we feel. Back to the point, sectoral balances, stimulus and debt deflation are definitely escoteric to the layman. Even to the informed, or the slightly informed, there is still a religious aspect to all the theories. I feel that if the president was a leader, he would come right out and tell us all this sucks. We’re in pain and that we need to adjust to fix this. War rations and the WRB prove that when push comes to shove, the gov can speak honestly, if not forcefully. Even if Obama came out tomorrow and said, some of us are employed and others are suffering, and we’re going to ask those that are employed to help those that are suffering with a public jobs initiative, as much as that is anathema to me, I may just suck it up and accept the price. That’s an explicit cost that taxpayers may accept, because it is explicit and it was defined in real terms. Talk to us like adults. Do it honestly, sorry to attribute Mish, but repeal Davis-Bacon, don’t hand out favors, and show the results on the news. Don’t let waste corrupt the effort. “Shovel ready” was a lie and we’re not kids here.

    That’s all for now. Economically, I’ll take a jobs program before more QE and more misguided stimulus and I think it takes a true American leader to sell that. Realistically, I have zero faith that the government can do that responsibly so I’m against it. Finally, we’re all adults here, so stop treating us like kids. That’s why I love your point 1.


    1. Edward Harrison says

      Scott, thanks for your thoughts. One observation I would make is that I
      don’t lump libertarians into the tea party. I am a libertarian myself and I
      don’t feel the tea party movement is libertarian. There are done in it
      because they have no where else to turn but there are more social
      conservatives in the movement than libertarians by a long shot.

      My view is that libertarian minded people have opposed the bailouts and this
      has pushed them away from Obama, eating up political capital that he could
      have used elsewhere. See here:

      The Clinton post is just a report of what Bill Clinton said and doesn’t
      necessarily reflect my own view.

      Edward Harrison
      Sent from my mobile phone

    2. Edward Harrison says

      Scott, I have a greater chance to reply in full now. I have been reading what progressives have been saying about Obama and the sense I get is that many of their complaints mirror the complaints from tea party activists: special interests making out like bandits, middle class being squeezed, government actively promoting this. The reason I believe that Obama is getting it from both the right and the left has to do with what I call corporatism. See here:

      What ordinary Americans want – regardless of political affiliation – is to know that government is actively resisting powerful special interests in order to benefit the economic fortunes of ordinary citizens. So, average Americans on the right and the left are united in this. How government does that is the key differentiating factor on the right versus the left.

      My sense is that most people are a political enough to give government a ‘free pass’ if the economy is doing well. That means that an increasing number of jobs, higher per capita income, and a growing economy are seen as de facto proof that government is working for the benefit of the people. When the economy turns down people start to look much more assiduously at the specific policies being implemented.

      For Obama this meant that many people were willing to give him a chance. I reckon Obama would have been able to push through jobs programs or the like in early 2009; your comments speak to that. Now, people far to the right never would give him a chance. People in the middle would. And people far on the left were predisposed toward the President.

      But people are now less willing to give him a chance as the economy has suffered. And when they look at his actual policies, they see ‘more of the same.’ This has meant Obama has suffered an erosion of support everywhere but the greatest erosion of support is in the middle where people were not predisposed but willing to give him a chance.

  6. Charles says

    At best, consumer confidence is struggling, excess reserves stand at about $1 trillion..yes, one Trillion, because banks don’t want to lend and the public favors savings instead of borrowing.

    Not sure how QE2 will help. I think the Fed’s pushing on a string.

Comments are closed.

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