Presidency in Peril?

Given the density and opaque nature of much of the detail in Kuttner's volume -- not to mention the usual end-of-the-term time pressures -- it might prove fruitful to open a line of discussion on the core argument in the book here on Obamadogs.

As the Frontline program from today, "The Warning," stressed, a major but not the sole force in the financial system's collapse was the trade in derivatives. It was not the only problem issuing from the deregulation instigated during the Clinton boom years; however, when Glass-Steagall was repealed in 1999, the volume of derivative trading took off and became tied to the securitization of mortgage debt, which in turn made the whole system vulnerable to a sharp setback when the housing market boom went bust. The story of Brooksley Born's efforts to get the Rubinistas to think about the lack of transparency is told in Kuttner's chapter on the loyal opposition, as is Sheila Bair's opposition to the way Summers and Geithner proposed to regulate the financial industry in the bill that was passed this year. It is noteworthy that the common denominator in this part of the story -- apart from the fact that Sheila Bair, Chair of the FDIC is also a woman fighting against so-called captains of finance -- is that the derivatives market remains largely dark and hence beyond transparency, let alone regulation. The problem was that the so-called regulatory reform bill was written by the bankers it supposedly regulated; as a result, we still have no idea of the extent to which toxic assets still cloud the balance sheets of major banks that are investment houses as well as banks. This flaw in the so-called reform is one reason why Kuttner sees Obama as no different than Bush in economic policy. (Obviously, there are other reasons such as Obama's waffling on the Bush tax cuts that make the two presidents more alike than different. But for Kuttner's story the difference lies in how the banks that created the mess have been treated: with kid gloves, including bailouts with taxpayer money with little in return by way of real regulation.) Consequently, the original purpose of banks -- to provide capital to entrepeneurs and thus help grow the economy so that growth produces jobs -- has taken a back seat to the search for profits by selling derivatives to clients stupid enough to buy them. The effect is seen is the anemic recovery: capitalism can't work without capital, and the too-big-to-fail investment banks and bank holding companies have no real "market incentives" (let alone government rules) to extend credit despite the fact that the Federal Reserve has forced interest rates to historically low rates.

All of this raises the question of what powers a president really has in Obama's situation. After all, he inherited the financial meltdown and the TARP Phase I rescue written by Bush Treasury Secretary. But, as Kuttner notes, he had choices on his economic advisers in the campaign and the leftist advisers got pushed aside for the Rubinistas as he made his key economic appointments. And, as Kuttner notes, Obama could have demanded more from the banks that were saved. In fact, he could've taken them over as Sheila Bair and the FDIC does for commercial banks and as the Resolution Trust Corp during the Savings and Loan crisis of the late 1980s. That didn't fit with his Rubinista adviser's worldview. In retrospect, his failure to get tough with Wall Street is the most consequential of his shorcomings thus far because of the lack of credit. Meanwhile, the diversion provided by the deficit keeps policymakers' eyes on the wrong ball. Deficits like ours will not shrink without dealing with unemployment first.

Anyway, that's a lot by way of summarizing the link between Kuttner's volume and today's video. There are lots of other things to look at, not least of which is how the heck Larry Summers is still regarded as such a genius given the way he messed up Harvard's once-untouchable economic stature. His track record of failure after failure would seem to speak for itself, loudly enough for Obama to pass over on him. Cristina Roemer's resignation as Chair of the CEA was due to Summers' bullying, which was predictable. Being cautious is one thing, but making appointments of known jerks is another.

I wish the Kuttner book were a bit shorter; but its critique is well documented and, unfortunately for those hoping that Obama would take down the Reagan demonization of government, a strong dose of reality. (As in real, not reality t.v.).

Please feel free to air questions, complaints, crticisms of the Kuttner volume on this blog. It might prove to be a huge help.