Obama's Loyal Opposition

"Part of the Way with LBJ"
-Students for a Democratic Society button, circa 1964

Progressives now find themselves in an awkward position of
simultaneously wishing Barack Obama well, but feeling dismayed by his
policies on some key issues, most notably the banking bailout. If this
were a normal economic situation, the posture of semi-opposition would
not be that big a deal. We would simply gratefully accept the decent
policies and keep pressing for bolder ones. But a failure to revive the
banking system would be Obama's Vietnam. It would wreck everything
else.

It's a too-familiar position for progressives, one that winds back
through all of the postwar Democratic administrations of my adulthood.
We wanted Lyndon Johnson to push harder for civil rights and
anti-poverty and not ruin it all in Vietnam. We were appalled at Jimmy
Carter's attacks on government, his failure to use his large Democratic
majority in Congress to press for progressive legislation, his refusal
to lift a finger on behalf of labor law reform. The memories of Bill
Clinton are sufficiently recent that we need little reminder of the
needless tilt to the right on economic issues from NAFTA to welfare
reform to financial deregulation.

What makes this situation different is, first, our gratitude on so
many fronts combined with the very high stakes of the financial rescue.
Barack Obama is an exemplary leader in so many ways, the leader we've
been waiting for. His commitment to restore constitutional government
is no small achievement. Those fighting for anti-poverty efforts and
children's initiatives have never seen increases in federal resources
comparable to the present ones. His foreign policy initiatives, from
his reaching out to Iran to his efforts on behalf of nuclear
non-proliferation are a breath of fresh air. And speaking of which,
Obama seems serious about reducing the carbon footprint.

But all of this promise could come to naught if the economy remains
mired in recession. And despite large scale stimulus spending, the
economy will remain stuck in first gear until the banking system is
revived.

The economists whom I most respect, such as Joseph Stiglitz, Jeff
Sachs, Simon Johnson, and Paul Krugman, all have grave doubts about
whether the Geithner-Summers plan can work. The more details are
revealed, the more curious it looks. If the plan did succeed in
bringing zombie banks back to life, we might hold our noses at the fact
that hedge funds and private equity companies were profiting, while
taxpayers and the Federal Reserve bore the risk.

The problem, however, is that the plan is not just outrageous in
terms of promoting a form of gambling with public subsidy, in which
taxpayers bear most of the downside risk while the speculators get most
of the upside gain. Nor is it problematic just because of the recently
exposed conflicts of interest, which range from the large speaking fees
given Larry Summers by some of the very firms that benefit from the
bailout to the fact that the Geithner approach was literally designed
not by the government but by Goldman Sachs, Pimco, and others that will
directly benefit.

The more serious problem is that the plan is conceptually flawed. It
presumes that it's possible to create a market that will bid up the
value of securities that have lost most of their worth because the
mortgages on which they were based will never be repaid at anything
like their par value. Banks can play all kinds of games to try to
increase the prices at which these securities trade. But unless the
taxpayers and the Fed make up virtually the entire loss in banks'
balance sheets, the trading games will not serve to recapitalize the
banks.

And if a total taxpayer bailout is the real plan, it would be far
better to do it straightforwardly with something like a Reconstruction
Finance Corporation. A new RFC would conduct real audits of troubled
banks (not "stress tests), determine how much capital they needed, and
decide what combination of taxpayer and Federal Reserve assistance,
coupled with sacrifices from bondholders and shareholders, would make
up the gap.

The administration's approach to the auto rescue suggests the more
robust strategy needed for the banks: take a hard look at the company's
books; fire incumbent management; make all stakeholders take some
sacrifices; and involve government directly in the design of a leaner
and more efficient successor firm. But nothing of the sort is being
done with the banks.

The political problem is that President Obama has decided to give
the Geithner-Summers approach a bigtime try. And until the approach
fails, there is little chance that Obama will turn to a Plan B.

But what does "failure" mean? A palpable failure would be that few
deals get made, even with all of the taxpayer financing and loan
guarantees. But the terms are so lucrative that there will surely be
some deals. The most likely scenario is that the banks limp along,
Japan style, while the Fed, Treasury, and FDIC dole out money in
increments big enough to stave off insolvency, but not sufficiently
large to bring the banking system fully back to life. In the meantime,
unemployment keeps increasing at something like half a million a month,
until it hits double digits. The continuing slump leaves the budget
deficit even larger than projected. State and local government keep
cutting programs and laying off workers because the stimulus package is
not large enough to make up for their revenue gap--and these cutbacks
and layoffs contribute to deepening recession.

At some point, it will dawn on the President that the approach is
not working, as it eventually dawned on the Japanese. But by the time
Obama does propose something bolder, he will have burned through a lot
of money and a lot of credibility, and the economic hole will be that
much deeper.

So where does this leave all the dismayed progressives who want this
administration to succeed as much as Obama himself does, but who fear
that Wall Street is leading Obama off a cliff? Most Congressional
Democrats feel they need to back their President, even as they use
Geithner as a lightening rod. The leadership of the labor movement,
though privately skeptical, desperately needs President Obama's
goodwill if they stand a prayer of getting the Employee Free Choice
Act. In recent weeks, I have been in several conversations with grass
roots activists wondering how to organize regular people around
something as convoluted and daunting as the details of the bank
bailout. Nobody had any silver bullets.

About all that the loyal opposition can do is shed more light on the
absurdity of the Summers/Geithner approach and help animate skepticism
in the media, the public, and eventually the President. In Congress,
one leader to watch is Rep. Carolyn Maloney, chair of the Joint
Economic Committee. Her next hearing, scheduled for Tuesday, is
must-viewing. It will feature Nobel Laureate Joseph Stiglitz; former IMF chief economist Simon Johnson, whose recent piece in the Atlantic Monthly
compared the US to third-world kleptocracies, and Thomas Hoenig, the
most outspokenly critical of the regional Federal Reserve Bank
presidents.

Maloney is particular brave, since her suburban New York district
would ordinarily make her a defender of almost anything Wall Street
wanted, on the ground that what's good for Wall Street is good for New
York's regional economy. Speaking of which, Maloney's Senate deputy
chair is Chuck Schumer, Wall Street's leading water-carrier among
Senate Democrats, which makes her doubly brave.

Other important loci of respectful opposition are the Congressional Oversight Panel,
whose latest report is also a must-read. Other members of the
opposition include Sen. Sherrod Brown, who recently became chair of a
Senate Banking Subcommittee on economic affairs, and Paul Volcker, who
heads a panel appointed by Obama (which has still not met) was keeping
his own counsel for a time, but has begun to be more actively engaged
again. This is all still a delicate balance act, less than ninety days
into a new administration that progressives must wish well.

We have two big things on our side: reality--the fact that the plan
is a Rube Goldberg contraption and a series of conflicts of interest;
and Obama's own intelligence and desire not to fail. But it is not easy
to play the role of loyal opposition to an attractive progressive
president who at times seems almost willfully determined to let himself
be captured by Wall Street.