Frank Rich's column this week, Has a ‘Katrina Moment’ Arrived?, is only a little hyperbolic in its thesis. In Rich's column, Tim Geithner and Laurence Summers play respectively the roles of Michael Brown and Michael Chertoff, and Summers comes in for particular attention:
The "dirty little secret," Obama told Leno on Thursday, is that "most of the stuff that got us into trouble was perfectly legal." An even dirtier secret is that a prime mover in keeping that stuff legal was Summers, who helped torpedo the regulation of derivatives while in the Clinton administration. His mentor Robert Rubin, no less, wrote in his 2003 memoir that Summers underestimated how the risk of derivatives might multiply "under extraordinary circumstances."
What to make of this, and what can President Obama do to avoid his economic Katrina, to avoid becoming another one-term economic failure like Jimmy Carter?
While Rich makes excellent points, I feel that he is perhaps too hasty in declaring the end of public trust in President Obama, no matter the conditional question mark in his title. His point, however, is a valuable one: Obama runs a serious risk of becoming the victim -- rather than the master -- of populist outrage over the ongoing excesses and crimes of Wall Street. His chosen economic team leaders are taking him down the road of political emasculation, and Obama does not yet show signs of changing course.
Many wise minds have been brought to bear on the question of how to proceed in a different way. Paul Krugman, in an influential column last month arguing that the economic stimulus bill might be too small to prevent a deflationary spiral, ended with this advice:
It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.
Sen. Bernie Sanders frequently (last heard on the March 19 Thom Hartmann broadcast) points out that the financial industry made 40% of all corporate profits in the US as recently as 2006, and has long outgrown its essential function of providing capital for healthy economic activity. Financiers instead have become blood-suckers draining the life out of the economy with arcane mathematical con games.
Thom Hartmann himself frequently argues for a drastic modification of the "free-trade" policies of recent decades, which have allowed corporations to kill off the American middle class. Hartmann is also a strong advocate of restoring the much more steeply progressive tax regimes followed by every president from FDR to Carter, which were associated with strong sustainable growth in the American economy as well as a vibrant broad middle class.
Joseph Stiglitz contributed several valuable suggestions on a different approach to the current crisis in a seminal article in The Nation. (h/t 1Eco) As Stiglitz points out:
Just think of what new lending $700 billion could have financed. Leveraged on a modest ten-to-one basis, it could have supported $7 trillion of new lending--more than enough to meet business's requirements.
An idea Stiglitz mentions deserves much more discussion:
One innovative proposal (variants of which have been floated by Willem Buiter at the London School of Economics and by George Soros) entails the creation of a Good Bank. Rather than dump the bad assets on the government, we would strip out the good assets--those that can be easily priced. If the value of claims by depositors and other claims that we decide need to be protected is less than the value of the assets, then the government would write a check to the Old Bank (we could call it the Bad Bank). If the reverse is true, then the government would have a senior claim on the Old Bank. In normal times, it would be easy to recapitalize the Good Bank privately. These are not normal times, so the government might have to run the bank for a while.
With the financial industry in need of severe downsizing (per Sanders), and the lack of large healthy banks to take over large sick banks, a solution emerges: bring the big money-center banks and other major actors like AIG into bankruptcy receivership. Sell off small profitable portions of the businesses to private investors in bite-size pieces, and leave the rest to await fire-sale liquidation.
Such a radical downsizing of the financial system would have to be done with international cooperation, and would require admission by all players that much of the wealth created in recent decades is illusory. A strong, comprehensive regulatory regime would have to be created internationally to keep finance within its original purpose of lubricating economies. Unregulated corners and scofflaw-nation tax havens would have to be dealt with.
Populist anger should be harnessed and utilized rather than feared and derided. Restoring much higher taxes on the wealthy, reasonable and unavoidable corporate taxes, and compensatory taxes on financial transactions like stock and bond trades will be necessary to pay the huge bills for rescuing the economy from this crisis. That populist anger will be necessary to resist the awesome power of money in government to resist these steps. In a diary a little over a year ago called What Barack Obama Needs to Do Now, I made this observation:
Emphasize an economic populist agenda. The victimization of millions of Americans by job outsourcing, predatory lending, tax policies that shift wealth to the top, and lies that lull them into submission should be the central issue of this election. The unfolding recession all but guarantees it....
Barack Obama faces a delicate balancing act here: he is a positive, optimistic figure, but he must learn how to sustain that while harnessing the potential anger of voters against those who have stolen their patrimony blind. Class has to re-enter American politics. Rebuilding the middle class and helping poorer and working class Americans is Obama's goal here, but emphasizing the growing income disparities in America and frankly explaining how Republican economic policies have fostered those disparities is a vital part of the message.
Nothing that has happened since has changed my view. Circumstances have certainly changed since those presidential primary days before the recession was obvious to the Beltway Wise Men, but the core of Obama's mission has not.
President Obama plans to roll out a new proposal for regulation of the financial industry soon, ahead of the upcoming G20 meeting. This will be his next chance to avoid further identification with the targets of popular anger, and for all our sakes I hope he makes a strong case for real reform. But given the cast of characters advising him, I'm worried. Sure hope he is too.
UPDATE: Well. Woke up this morning to quite a stir. I've read through the comments so far (almost 550 and counting) and am delighted by the robust discussion that's taking place. It's a good thing to disagree and break up the Amen Chorus once in a while. I feel the need to respond to many commenters here who object to my thesis, and will do so up top to avoid saying the same thing dozens of times.
To those who object to the Katrina metaphor, I understand completely. Really, I do. But let me also point out that there is a difference between using "Katrina" as a metaphor, and using "Katrina moment" as a metaphor. The former refers to an inexpressible human tragedy, made worse by criminal government inaction. The latter refers, in my mind, to the irretrievable loss of public trust in a leader due to perceived malfeasance or nonfeasance. Nobody -- not me, not Frank Rich, not anybody else -- has suggested that this has already occurred to Barack Obama. What we are suggesting that, without changes in the trajectory of the administration's handling of the financial crisis as perceived by the public, such a loss of trust may occur. And it may occur suddenly and violently.
To those who object that Obama's only been in office for two months, so how can we blame him for not fixing everything: true enough. But how long does this argument hold? Should we sit back and trust Obama despite our own independent judgment that he's headed in the wrong direction? Will we find ourselves, six months from now in an entirely possible further economic deterioration, sounding like the conservatives who excused Bush for 9/11 saying he'd only been in office for eight months, and so it must really be Clinton's fault? Remember, we've seen this movie before. Bill Clinton campaigned in 1992 in populist terms, and once elected turned on a dime under the advice and guidance of Bob Rubin and Alan Greenspan. Do we really want to sit back and let that happen again? Barack Obama has asked us to stay engaged and to keep him honest. He has already asked for our criticism, so why not give it?
To those who object that we're repeating Republican talking points: too fucking bad. I'm talking to Obama supporters, who I hope will help bring pressure on the administration to remember the middle class and stay on our side when our interests conflict with Wall Street's. I would rather register my criticisms now and try to make sure Republican talking points remain lame lies, rather than give them devastating and accurate criticisms. Waving our arms around about repeating Republican talking points being harmful is rather childish and magical thinking, frankly. It doesn't give credit to the responsibility we have as citizens to criticize our leaders when warranted.
Thanks to all who read and commented, agreed or disagreed. The thing I love about this community is that we can thrash these things out and still stay on the same side, working for our country's future.