Tough Love for Obama

Barack Obama is one of three nominees I voted for with enthusiasm. The
first, Lyndon Johnson (then in his 1964 civil-rights and anti-poverty
phase), self-destructed over Vietnam. The second, George McGovern, lost
49 states. For the next three decades, Republican presidents pulled the
country and the prevailing ideology far right, while Democratic
interludes moved it only to the center.

But Obama portended something different altogether. Here was a
rendezvous of a gifted, principled, and politically shrewd leader with
a deep crisis caused by the failure of free-market ideology. It was --
and is -- the most stunning political opportunity for American
progressives since Franklin Roosevelt. My reaction to Obama's election
was joy, relief, gratitude.

So it is awkward to find myself in semi-opposition after barely 100
days. I'm not a chronic malcontent. I credit Obama with real leadership
on multiple fronts, from redeeming the Constitution to reclaiming
America's constructive role in the world. I think he is handling
several tricky issues well -- accepting the need for large short-term
deficits; disclosing details of Bush-era torture without personally
sponsoring an inquisition; moving universal health coverage; devising a
labor-law reform that can perhaps get 60 votes. All this is huge. But
there still is a large risk that Obama will blow the opportunity that
history has handed him, and that the political right, though currently
in disarray, will pick up the pieces.

The reason, of course, is the economy. The past weeks have seen
efforts to seize on every shred of good (or not as bad as expected)
economic news. The commercial paper market is loosening up! Some new
homeowners are getting bargains! The economy only lost 539,000 jobs in
April instead of the predicted 620,000!

Even so, the most optimistic of economists predicts a long slog. We
will likely avert a second Great Depression. But we still face a
prolonged Great Stagnation, one that could be far worse than necessary
because of the administration's circuitous, Wall Street-friendly
approach to reviving the banks.

Instead of closing or breaking up failed banks, dividing the losses
between taxpayers and bondholders, and getting the successor banks
quickly back to health, the Treasury is propping up the incumbent
zombies. Worse, it is doing so with convoluted schemes that rely on
Wall Street's most speculative and unsavory players backed by loans
from the Federal Reserve and guarantees against losses from the
Treasury. The hope is that that the speculators will bid up the value
of toxic securities on banks' books, now cheerfully rebranded as
"legacy" securities. On that risky proposition, Obama is gambling his
presidency.

This policy is likely to prolong the agony and leave a still-wounded
banking system dragging down the real economy. As politics, it reflects
an alliance with Wall Street that was bipartisan in the Clinton and
Bush years and that has continued into the Obama presidency -- despite
Wall Street's practical disgrace. When affronts such as the American
International Group and Merrill Lynch bonuses presented opportunities
to rally public opinion behind deep structural reforms, the
administration's response was to damp down the popular indignation, not
rev it up.

The contrast with Roosevelt's first year could not be more dramatic.
FDR pledged in his Inaugural Address to "drive the moneychangers from
the temple." He encouraged the populist investigations of the Senate
Banking Committee under Ferdinand Pecora and used the backlash to build
popular support for sweeping reform. Roosevelt engineered a deliberate
political rupture with the old order, one that was politically
necessary to counter the financial industry's enduring political power.
FDR's key advisers did not have the Wall Street sensibilities of
Messrs. Summers and Geithner.

It was, to be sure, a different era. The crisis was even more dire,
and there were radical movements in the country to Roosevelt's left.
Today, the people are anxious but quiescent, and Obama is, by nature,
not confrontational. He hired the proteges of Robert Rubin during the
campaign when he needed to demonstrate that he was reassuringly
mainstream. They stuck around -- and their advice could sink the
promise of his presidency.

As we were going to press, Congress, with broad bipartisan support,
was on the verge of enacting a new Pecora Commission, with subpoena
power and a mandate to investigate the roots of financial collapse and
build the case for systemic reform. Done properly, this investigation
will embarrass all three recent administrations, including Obama's. In
a tacit rebuke, all 10 of the commissioners are to be appointed by
Congress, none by the White House.

I still have faith that Obama may eventually get it right. But time
is not on his side, and he needs some help from his friends.