Tough Love for Obama
Can Obama’s supporters save him from his economic advisers?
By Robert Kuttner
…The past weeks have seen efforts to seize on every shred of good (or not as bad as expected) economic news. The commercial paper market is loosening up! Some new homeowners are getting bargains! The economy only lost 539,000 jobs in April instead of the predicted 620,000!
Even so, the most optimistic of economists predicts a long slog. We will likely avert a second Great Depression. But we still face a prolonged Great Stagnation, one that could be far worse than necessary because of the administration’s circuitous, Wall Street–friendly approach to reviving the banks.
Instead of closing or breaking up failed banks, dividing the losses between taxpayers and bondholders, and getting the successor banks quickly back to health, the Treasury is propping up the incumbent zombies. Worse, it is doing so with convoluted schemes that rely on Wall Street’s most speculative and unsavory players backed by loans from the Federal Reserve and guarantees against losses from the Treasury. The hope is that that the speculators will bid up the value of toxic securities on banks’ books, now cheerfully rebranded as “legacy” securities. On that risky proposition, Obama is gambling his presidency.
This policy is likely to prolong the agony and leave a still-wounded banking system dragging down the real economy. As politics, it reflects an alliance with Wall Street that was bipartisan in the Clinton and Bush years and that has continued into the Obama presidency — despite Wall Street’s practical disgrace. When affronts such as the American International Group and Merrill Lynch bonuses presented opportunities to rally public opinion behind deep structural reforms, the administration’s response was to damp down the popular indignation, not rev it up.
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