As President Obama laid out his administration's tough, some might say harsh, new stance toward the auto industry Monday morning, there was no avoiding one all-important question. Why so hard on Detroit, and so easy on Wall Street?
Never mind the question of whether the conditions set for further aid to G.M. are too tough. It is very difficult to understand how G.M.'s CEO Rick Wagoner kept his job as long as he did, and anyone who has followed the fortunes of Detroit's car companies over the past five years has to acknowledge that they massively failed to compete effectively in the global marketplace. Detroit blew it, and restructuring is the only endgame. The economies of Ohio and Michigan are certain to be further pummeled. But that was inevitable.
The real question is how can Obama say this:
Year after year, decade after decade, we have seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we have reached the end of that road. And we, as a nation, cannot afford to shirk responsibility any longer. Now is the time to confront our problems head-on and do what's necessary to solve them ...
It will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts.
And not understand that Congress and the American public are sure to ask why Citigroup and Bank of America are not being held to the same standard. Treasury Secretary Tim Geithner's plan to create a market price for toxic assets has been widely lambasted as a scheme to paper over banking sector insolvency. If Obama can force Wagoner to resign, based on his record, then why haven't Citigroup's Vikram Pandit and Bank of America's Ken Lewis been forced to step down? If the White House can declare that G.M.'s bond-holders must accept they will not be repaid in full what they are owed, then why aren't Citigroup and Bank of America's debt-holders being told the same thing?
Why is there one standard for Rust Belt workers and another for Wall Street investment bankers?
Judging by his blockbuster Atlantic article detailing how Wall Street has rewritten the global economic rules over the last 30 years, a critic such as former IMF chief economist Simon Johnson would argue that the reason for the apparent double standard is that Wall Street's desires determine White House policymaking. In this scenario Obama is no different than either Bush president, or Clinton, or Reagan; he and his team are more concerned with banker priorities than worker hardship. Until the day the White House releases a fact sheet and viability assessment on Citigroup that hammers it as hard as today's assessment of General Motors, that critique will gain in strength and potency.
But it is not the only possible explanation. There are a few brave, or perhaps foolhardy, analysts who are willing to argue that the administration's approach to the banking sector could actually be preparation for the ultimate endgame of nationalization or government-expedited bankruptcy restructuring, rather than the free pass to the banks it currently appears to be.
In this scenario the ongoing stress tests, in conjunction with the price discovery mechanism for toxic mortgage-backed securities that is at the heart of of the Geithner plan to fix banking balance sheets, will reveal once and for all which banks are truly insolvent and cannot survive in their current form. Having established that beyond a doubt -- much as the government's analysis of G.M. and Chrysler's situation has established pretty conclusively that they cannot continue as currently structured -- there will be no other alternative than a government takeover.
Which of these scenarios is more likely to be true? Recent history is on the side of those who believe that Wall Street pulls the strings. Only the course of events over the next few months will tell us whether the alternative explanation holds water. But as I watched Obama speak, I could not shake the feeling that this was a trial run, rather than a sellout, as preparation for the application of further strong medicine, rather than avoidance of the real problem. He's too smart, and his advisors are too smart, to think that he could go before the American public and criticize the "principle of endless bailouts" without knowing that he would be held to account for those words.
And let's remember that notwithstanding the huge size of G.M. and its centrality to the economy of the United States, the logistical complexities and downstream impact of a G.M. bankruptcy restructuring likely pale against those involved with a Citigroup or a Bank of America. Telling the nation that G.M. will not survive in its present form has investors selling shares and workers in Michigan and Ohio angry. Telling the world that Citigroup is toast would drop an even bigger bomb.
So the big reckoning is still coming. Today the White House signaled it planned to be tough. The next few months will let us know just how tough the current administration really is.