Is Obama Wrong?

When I left on vacation, the right was calling Barack Obama a socialist. When I got back, the new slur was "fascist." The politically impotent Dick Armey pronounced,
"For the first time I have a president that scares me." At least,
unlike Rush Limbaugh, Armey didn't sound an alarm about having to "bend over, grab the ankles" for Obama. Thanks, Dick, for keeping your sexual insecurities out of the debate this time and sticking to generic fearmongering. (Still, I'm so damn glad I'm not married to that guy.)

Clearly
Republicans are trying a desperate strategy of displacement, to
convince the country that Obama, not our devastated economy, is the
monster we should fear. But it's not working. While Beltway journalists
ponder big, important questions like whether Obama laughs too much
during interviews or over-uses his teleprompter, the American people
overwhelmingly approve of the job Obama is doing, and even trust him to
get the economy back on track.

Meanwhile, Newsweek is headlining its current cover "Obama Is Wrong"
-- but this time it uses Paul Krugman, not the normal cast of village
idiots, to indict the new Democratic president. What a novel idea. I
had to suppress my instinct to defend Obama -- Krugman doesn't think
Obama is wrong about everything, folks -- because I think Krugman is
alarmingly right on the key issue at hand: Treasury Secretary Timothy
Geithner's subsidizing private investors to take can't-lose "risks" and
buy up the banks' "legacy assets." (Don't call them toxic!)

Krugman
has colorfully labeled the plan "cash for trash," and on Sunday, he
went head-to-head (sort of ) with Geithner, appearing after the
treasury secretary on ABC's "This Week" and deriding his "plan to
rearrange the deck chairs and hope that that keeps us from hitting the
iceberg." For his part, Geithner insisted, "To get out of this we need
banks to take a chance on businesses, to take risks again," and argued
it was better for taxpayers to have private firms bear at least some of
the cost of the bank overhaul (as opposed to Krugman's proposal that
the government temporarily nationalize troubled banks).

Krugman isn't the only smart person raising these concerns. If Evan Thomas' smug tone in the Newsweek piece turns you off, take the time to read Simon Johnson's terrifying Atlantic piece, "The Quiet Coup,"
which lays out the foundation of our current mess and then comes to
similar conclusions as Krugman about the drastic steps needed to
recover: The government must take over unhealthy banks, dramatically
restructure them, save the ones that can be saved and later sell them
back to private investors. (The piece was apparently written before
Geithner's plan was released so it doesn't comment on it directly.)

Coming out of vacation, I'm a little late to Johnson's opus -- Glenn Greenwald wrote about it here
-- but I don't think it can get too much attention. Johnson traces the
growing political and economic clout of the financial industry in the
last 20 years, and how that power, in turn, distorted both politics and
the economy. In the '70s and early '80s, Johnson found, "the financial
sector never earned more than 16 percent of domestic corporate
profits." This decade that percentage soared to 41 percent. Likewise,
financial sector salaries used to be roughly comparable to other
domestic private industries, but they rocketed to 181 percent of the
"average" private-sector salary in 2007.

Meanwhile, as the right
and the left debate what, exactly, caused the current mess, Johnson
shows that every single possible culprit had one thing in common: It
benefited the increasingly powerful financial sector, the monster that
ate the American economy:

"Top investment
bankers and government officials like to lay the blame for the current
crisis on the lowering of U.S. interest rates after the dotcom bust or,
even better-in a "buck stops somewhere else" sort of way-on the flow of
savings out of China. Some on the right like to complain about Fannie
Mae or Freddie Mac, or even about longer-standing efforts to promote
broader homeownership. And, of course, it is axiomatic to everyone that
the regulators responsible for "safety and soundness" were fast asleep
at the wheel.

But these various policies-lightweight
regulation, cheap money, the unwritten Chinese-American economic
alliance, the promotion of homeownership-had something in common. Even
though some are traditionally associated with Democrats and some with
Republicans, they all benefited the financial sector. Policy changes
that might have forestalled the crisis but would have limited the
financial sector's profits-such as Brooksley Born's now-famous attempts
to regulate credit-default swaps at the Commodity Futures Trading
Commission, in 1998-were ignored or swept aside."

All
of that might seem like ancient history -- Obama's moving to clean up
the mess, right? Except Johnson, like Krugman, believes that the
continued power of the financial oligarchy makes real reform
impossible. A former chief economist for the IMF, Johnson sees scary
similarities between the behavior of U.S. political and business
leaders, and the titans of the corrupt and ultimately bankrupt
economies the IMF had to work over during his time there:

"Elite
business interests-financiers, in the case of the U.S.-played a central
role in creating the crisis, making ever-larger gambles, with the
implicit backing of the government, until the inevitable collapse. More
alarming, they are now using their influence to prevent precisely the
sorts of reforms that are needed, and fast, to pull the economy out of
its nosedive. The government seems helpless, or unwilling, to act
against them....

The challenges the United States faces are
familiar territory to the people at the IMF. If you hid the name of the
country and just showed them the numbers, there is no doubt what old
IMF hands would say: nationalize troubled banks and break them up as
necessary."

Strangely, or not, on the same morning I read Johnson, a smart reader took the time to send me this 1999 New York Times piece
about the way leading Democrats, including Clinton administration
Treasury Secretary and Obama economic czar Larry Summers, hailed the
repeal of Glass-Steagall, the Depression-era law that kept banks out of
the insurance and broker businesses. It's as tough to read as Simon
Johnson's piece, in its way.

''Today Congress
voted to update the rules that have governed financial services since
the Great Depression and replace them with a system for the 21st
century,'' Treasury Secretary Lawrence H. Summers said. ''This historic
legislation will better enable American companies to compete in the new
economy....''

Administration officials and many Republicans
and Democrats said the measure would save consumers billions of dollars
and was necessary to keep up with trends in both domestic and
international banking. Some institutions, like Citigroup, already have
banking, insurance and securities arms but could have been forced to
divest their insurance underwriting under existing law. Many foreign
banks already enjoy the ability to enter the securities and insurance
industries.

''The world changes, and we have to change with
it,'' said Senator Phil Gramm of Texas, who wrote the law that will
bear his name. "Glass-Steagall, in the midst of the Great Depression,
came at a time when the thinking was that the government was the
answer. In this era of economic prosperity, we have decided that
freedom is the answer....''

''If we don't pass this bill, we
could find London or Frankfurt or years down the road Shanghai becoming
the financial capital of the world,'' said Senator Charles E. Schumer,
Democrat of New York. ''There are many reasons for this bill, but first
and foremost is to ensure that U.S. financial firms remain
competitive.''

Oy. A few Democratic heroes spoke
against the bill -- North Dakota Sen. Byron Dorgan and, not
surprisingly, the late Paul Wellstone. ''I think we will look back in
10 years' time and say we should not have done this but we did because
we forgot the lessons of the past, and that that which is true in the
1930's is true in 2010,'' Dorgan said presciently.

The article
confirmed a feeling I've had for a while, that the Democrats can't get
us out from under this mess until they are forced to reckon with their
role in creating it. Every time I see Chuck Schumer on television
pretending to be a populist scourge of Wall Street, I remember his role
in blocking higher taxes for hedge fund managers and repealing
Glass-Steagall. I can't help thinking that Tim Geithner is too close to
the industry that took over -- and took down -- the economy to tame it.
A large part of the Democrats' resurgence in the last four years,
ironically, has been its success raising money from Wall Street, which
undermines its populist street cred at a time like this. Fortunately
for the party, Republicans are just as compromised, so it's not too
late to for Democrats to take leadership in bucking the financial
oligarchy and develop real solutions to the financial crisis.

But
if you believe Simon Johnson, it may almost be too late. That's what we
should be debating, not Obama's teleprompter use, or whether Paul
Krugman has it in for the new president. So I'm glad to be back from
vacation, really; we have a lot of work to do.