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:
- 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.
- 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.
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?
- 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.
- 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.
- 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:
- 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.
- 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.