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.