The Obama Administration’s victory lap

Financial Institutions | Edward Harrison | March 8, 2010 7:14 pm |

I know I shouldn’t beat this dead horse but I can’t help myself. Just this past Friday, when describing Andy Xie’s hopeful tone in sensing a change of the short-sighted and ruinous mindset that was driving policy makers in the U.S., I wrote:

I am glad he is hopeful that Obama sees the folly in more bailouts and malinvestment. Perhaps he is on to something. However, I do not expect the mindset to change whatsoever. Bank profits are back at record levels and the worst of the panic is now over. You don’t get a change in mindset in that environment. More likely, you get a victory lap.
-The mindset will not change; a depressionary relapse may be coming

And almost on cue we have two pieces on Tim Geithner which are clearly victory laps by the Obama Administration. In the Atlantic’s piece, we learn:

[The Clinton folks running things in Obama’s White House] see themselves as an elite corps, bound by the common experience of having battled the crises of the 1990s and mostly prevailed. They share the belief that a potent combination of speed, force, and nerve—a buccaneering willingness to cast aside doubt, seize the levers of government, and apply its full power—can halt financial panics. They also believe that governments typically do too little to respond, rather than too much, and pay a steep price for it. Applying this formula is what Geithner has been doing in the biggest crisis since the Great Depression. Other Obama officials share this outlook, notably Summers, who now directs the National Economic Council. But the faith runs purest in Geithner.
From Geithner’s perspective, this approach is the surest, cheapest, and least destructive way to save an economy in danger of collapse.

While written in the present tense, you almost can hear Geithner speaking of the credit crisis and economic destruction it wrought in the past tense.

Hello? Have you noticed the 17% underemployment and record foreclosures? Oh yes, those. That’s the cost of doing the right things that are also “deeply unpopular, deeply hard to understand.” The cost:

is that it is galling to the public. It requires abstaining from moral judgments and pumping tax dollars into the same institutions that inflicted the pain, as part of an all-hands-on-deck effort to restore economic confidence. This has had the politically deleterious effect on the administration, and especially on Geithner, of appearing to routinely submit to Wall Street. It’s what lies behind the public’s anger, the feeling that some fundamental injustice is being allowed to perpetuate itself—a sentiment that violently upended the Obama agenda in January, when the Massachusetts Republican Scott Brown won the special Senate election to replace Ted Kennedy. Brown’s victory immediately derailed Obama’s signature initiative, health-care reform. But his win was widely interpreted as an expression of anger at the White House for its handling of the economy, and particularly of Wall Street.

The Atlantic points out that Geithner does not represent change you can believe in. And says:

The fact that most of the bailouts driving this anger occurred under George W. Bush has been easy to overlook, in part because Geithner is the most visible constant between the two administrations. At every stage, he has been central to the crisis—during the initial response, the design of the recovery plan, and the effort to devise new rules. “During the Bush administration,” Keith Hennessey, a former director of Bush’s National Economic Council, told me, “you basically had three people who were the core in making the policy recommendations to the president and implementing them. And they were Hank Paulson, Ben Bernanke, and Tim Geithner. Now it’s Larry, Ben, and Tim, and Tim has moved chairs. What this means is that two-thirds of the core policy group is unchanged from Bush to Obama. The Obama political and communications operations have always wanted to emphasize just how different and transformative the Obama solutions are, relative to the Bush people who—they claim—left them this enormous problem. The reality is, there is remarkable continuity, from a personnel standpoint and a policy standpoint, in what’s being done.”

This is a fairly even-handed piece that paints Geithner as a well-meaning man who is a product of the system we witnessed bringing the world to its knees.

On the other hand, a New Yorker article is an out and out puff piece titled “No Credit” that Timothy Geithner himself could have written. Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

Let me give you a few quotes. As you read them imagine the Treasury Secretary writing them, reminding himself “I need to plant an even-handed but flattering account of myself” as he does it. I have inserted my own commentary too!

Straw man argument

In the history of product launches, the rollout of the Obama Administration’s plan to stabilize the financial system was in the category of “Ishtar,” smokeless cigarettes, and New Coke. On February 10th of last year, the newly appointed Treasury Secretary, Timothy F. Geithner, appeared in the Treasury’s Cash Room to outline proposals that would relieve banks of toxic assets, force them to undergo stress tests, and provide relief for struggling homeowners. Immediately after Geithner’s speech, the Dow fell sharply, and it closed the day down 382 points. Critics from all quarters dismissed Geithner’s plan as vague and inadequate. “Has Barack Obama’s presidency already failed?” Martin Wolf, the Financial Times’ influential economics commentator, wrote. “In normal times, this would be a ludicrous question. But these are not normal times.”

Those Obama people looked pretty bad at first. I have to admit.

But look at the success

And yet—whisper it softly—there is good news about the financial system and the roundly loathed bank bailout, the seven-hundred-billion-dollar relief package that Congress approved in October, 2008. During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses. While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers. Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars—and much of that related to propping up General Motors and Chrysler. Barring something unexpected, the bailout will end up costing taxpayers less than the savings-and-loan implosion of the early nineteen-nineties. The government could conceivably end up making money.

$140 billion. That’s a lot of money that didn’t have to come from taxpayers. Gosh, I did not know that. Wow, the Obama Administration really got the job done, didn’t they? But what about the Bushies?

The Bushies were horrible

When President Obama came to office, the Bush Administration had already committed two hundred and thirty billion dollars of taxpayers’ money to big banks—a policy that Geithner, as president of the New York Federal Reserve Bank, helped to enact. During the transition, he warned the incoming President that more “repugnant” actions would be necessary to shore up the financial system and restore economic growth. (In the first three months of 2009, G.D.P. declined at an annual rate of 6.4 per cent.) “We knew it would be politically costly, but not nearly as costly as if we hadn’t got it right,” Geithner said to me of the financial stabilization plan. “And we didn’t think we had other options available that were credible.

Wow, yet more I didn’t know. I thought the second AIG, Bank of America and Citigroup bailouts were done by Obama. I though the PPIP was an Obama program too. This is a lot different than the Atlantic account where Ben, Tim and Hank turn into Ben, Tim and Larry. I’m glad I’ve got it straight now – Bush bad, Obama good.

We were tough but fair

Other critics dismissed the tests as a sham, arguing that the economic assumptions underpinning them were too benign. As the tests unfolded, however, it became evident that the government’s loss projections were quite high, and that many banks would be forced to raise considerable sums of money—in some cases, more than ten billion dollars. “When people did the math, they said, ‘This is for real,’ ” Mark Zandi, the chief economist and co-founder of Moody’s Analytics, recalled. “That went for the banks, too. They complained that they didn’t need to raise all of this capital.”
In fact, some commentators agreed that the Treasury and the Fed were being too tough on banks.

Yep. The banks didn’t like the tough cop on the beat bit one bit. We sure showed them! That’s why we allowed them to exit TARP, no strings attached – and pay record bonuses too.

Back on Earth

Can I run my Jack Nicholson clip again, please?

Secretary, I have just one more question. If you gave an order that the economy wasn’t to be touched and your orders are always followed, then why would the economy be in danger?

I want the truth!

Geithner: You can’t handle the truth!

I have a greater responsibility than you can possibly fathom. You weep for the unemployed, you curse the U.S. Government. You have that luxury. You have the luxury of not knowing what I know – that the bailout, while tragic, probably saved lives. And, my existence, while grotesque and incomprehensible to you, saves lives.

I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide and then questions the manner in which I provide it.

Did you order the Code Red?

You’re goddamn right I did.