Never-Ending Bailout

If these were normal times, I would give Obama pretty high marks for his Presidency thus far, particularly on domestic issues. The stimulus bill was small but OK, and they are following it up with a progressive budget that puts a down payment on a host of needed priorities in energy, health care, education and more. They are even talking about using the budget reconciliation process to sidestep the filibuster and pass items related to revenue, like energy and health care, with just 50 votes. The simple fact of this threat shows that they are learning how to negotiate and won't make some of the same mistakes made to give agency to Republicans and centrists on the stimulus bill. Further, Obama's weekly address made a very stark statement to those special interest who would seek to upend his budget plans:

I realize that passing this budget wont be easy. Because it represents real and dramatic change, it also represents a threat to the status quo in Washington. I know that the insurance industry wont like the idea that theyll have to bid competitively to continue offering Medicare coverage, but thats how well help preserve and protect Medicare and lower health care costs for American families. I know that banks and big student lenders wont like the idea that were ending their huge taxpayer subsidies, but thats how well save taxpayers nearly $50 billion and make college more affordable. I know that oil and gas companies wont like us ending nearly $30 billion in tax breaks, but thats how well help fund a renewable energy economy that will create new jobs and new industries. In other words, I know these steps wont sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know theyre gearing up for a fight as we speak. My message to them is this:

So am I.

The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I dont. I work for the American people. I didnt come here to do the same thing weve been doing or to take small steps forward, I came to provide the sweeping change that this country demanded when it went to the polls in November. That is the change this budget starts to make, and that is the change Ill be fighting for in the weeks ahead change that will grow our economy, expand our middle-class, and keep the American Dream alive for all those men and women who have believed in this journey from the day it began.

This is all really great, and with Republicans imploding, there is an opportunity to make lasting gains that will tangibly help people for a generation. And again, in normal times, I would totally agree with Mike Lux.

Though the recent economic recovery bill was too small and had its flaws, it was literally the biggest single investment in progressive social capital - health care, public education, green jobs, infrastructure, universal broadband - in history. His budget might well be the most audacious and sweeping in progressive history as well - certainly one that competes with LBJ's 1965 budget and FDR's 1935 budget. Obama is fulfilling his promise to the America people in the 2008 campaign: big, bold, truly transformative change.

Frankly, I didn't expect this would happen, at least not right away. Watching him pick mostly centrists for cabinet positions, and knowing how the DC establishment can use a thousand big and small reasons to argue against transformative change, I feared that Obama would be convinced to scale back his ambitions for what I call in The Progressive Revolution a Big Change Moment, similar to ones we had in the 1860s, early 1900s, 1930s, and the 1960s. Over the last few decades, Democrats have adopted a culture of caution - they have tended to think small and go slow. I feared that Obama would succumb to that culture.

But he is rising to the challenge.

It's all true. But I am very sad to report that these are not normal times. We are facing a near-total collapse of the financial sector, with trillions of dollars thrown around casually in seemingly endless ways. Contrary to popular opinion, moving forward on progressive priorities will not inspire a backlash. But the never-ending bailouts will. The right-wing efforts have been clumsy at first and we all laughed at them, but once they find their targets they will hone in like a laser. It doesn't matter that a Republican President in this position would protect the banks and the elites by throwing trillions at them in much the same fashion. It doesn't matter than the Republican solutions would be things like tax holidays and corporate welfare that would make things worse. What the Obama Treasury Department is doing is unacceptable and, more important, bound to be ineffective.

The A.I.G. bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of A.I.G.’s demise. They are sophisticated investors, and they should have known the risks being taken — and who profited mightily from the relationship before it all came crashing down.

Whomever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts.

The serial A.I.G. bailouts are especially problematic for their connection to the Wall Street bank Goldman Sachs. At the time of the first A.I.G. rescue last fall, it was reported by Gretchen Morgenson in The Times that Goldman was A.I.G.’s largest trading partner, with some $20 billion of business tied into the insurer. Goldman has said that its exposure to risk from A.I.G. was offset, or hedged, by other investments.

What is certain is that Goldman has lots of friends in high places — yet one more reason why this bailout has to be as transparent as possible. Lloyd Blankfein, Goldman’s chief executive, was the only Wall Street executive at a September meeting at the New York Federal Reserve to discuss the initial A.I.G. bailout. Also involved in the discussion was the then head of the New York Fed, Timothy Geithner, who is now President Obama’s Treasury secretary.

That was in the New York Times, but you could see it as the opening of a cover story for the Weekly Standard. Republicans' best option, and the one they'll eventually come around to, is to attack the mismanagement of a crisis they created. And if the financial sector drags down the rest of the economy, they'll pivot to saying that all those progressive measures didn't work. That's an argument the American people may well accept.

I don't really have an answer for what to do now. I think a temporary takeover of the worst banks is probably what's needed, but there's no guarantee of success given how deep the problem really is. The Federal Reserve is launching a consumer credit program today aimed at lending up to $200 billion in consumer loans. Given that, I don't see the need for any insolvent banks - the Fed is doing their work. Even if the American problem is managed, because of the globalized nature of the system banks around the world need a solution before recovery can occur.

But what I know now is that what Treasury is doing isn't designed to work, it's designed to keep zombie banks alive with taxpayer money.

Every plan we’ve heard from Treasury amounts to the same thing — an attempt to socialize the losses while privatizing the gains. We’re going to buy up all the bad assets at premium prices; no, we’re going to offer the banks guarantees against losses; no, we’re going to let private investors buy the stuff, but offer them de facto guarantees against losses in the form of non-recourse loans.

Underlying all this, apparently, is the theory Tim Duy sums up so aptly:

"Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound. They seem incapable of envisioning a world in which this is not the case. This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply “bad.” For Bernanke and Geithner, there are no bad assets. Only misunderstood assets."

And the insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid?

Elite bankers are masterminding these decisions and imperiling the Obama Presidency. He needs to know that.