A Crisis Wasted

Barack Obama's Defining Decisions

Reed Hundt

• Publisher: RosettaBooks
• Year: 2019
• ISBN:
  9780795352218
• Topic: Economia
• Subtopic: Politica economica

"The blow by blow story of a president and his team wasting the 'opportunity' of the Great Recession to change the fundamentals of the economy." — Steven Brill, New York Times– bestselling author This book is the compelling story of President Obama's domestic policy decisions made between September 2008 and his inauguration on January 20, 2009. Barack Obama determined the fate of his presidency before he took office. His momentous decisions led to Donald Trump, for Obama the worst person imaginable, taking his place eight years later. This book describes these decisions and discusses how the results could have been different. Based on dozens of interviews with actors in the Obama transition, as well as the author's personal observations, this book provides unique commentary of those defining decisions of winter 2008–2009. A decade later, the ramifications of the Great Recession and the role of government in addressing the crisis animate the ideological battle between progressivism and neoliberalism in the Democratic Party and the radical direction of the Republican Party. As many seek the presidency in the November 2020 election, all candidates and of course the eventual winner will face decisions that may be as critical and difficult as those confronted by Barack Obama. This book aims to provide the guidance of history. "A powerfully lucid, compelling and surprising achievement... makes a subtle but irresistible argument that, given the conservative undertow of American politics, liberals and progressives who are serious about change can't just wing it but must prepare detailed economic policy analyses and prescriptions long in advance of taking power." —Congressman Jamie Raskin, Representative from Maryland's 8th District

1

To Chicago in the Snow

History is valuable, to begin with, because it is true…

— Bertrand Russell, “On History,” 1904

The Chicago winter sun clocks short, ineffectual hours, counting on electricity to do the inside jobs, abandoning the outside to whatever Canada exports. The 16th of December in 2008 welcomes the Obama advisers coming in from Washington to O’Hare with miserable weather that is a metaphor for the awful economy. The thermometer will do no more than squeak barely above 20 degrees Fahrenheit. Rising wind will push out dawn’s polluted fog and fill the air with the third big snowfall of the season.

The advisers take the train from the airport to the campaign’s downtown office. Not yet recognizable even for a C-SPAN watcher, they draw no attention as they head for the meeting that will establish their personal role in history. They are to explain to the president-elect what he must do, and cannot do, to help America recover from the worst economic crisis in 60 years.

The advisers cannot believe how shaky is the ground under the finance industry. Based on their studies over three decades during which they got their advanced degrees, gained prestigious appointments, and became prominent in their circles, they believe that what is happening in the economy cannot be happening. Markets are supposed to have so much information that they can never be paralyzed by uncertainty. Businesses do not lay off workers only because of perturbations in the price of obscure securities. Depositors and creditors cannot doubt that the most prestigious banks could pay their debts. The transparent economy does not have shockingly opaque and frightful depths. Nevertheless these experts have to explain to Obama what had happened, was happening, and was to come.

They all believe that the great accomplishments, the transformations of society, that Obama had run for the highest office in order to achieve, lie on the other side of stabilizing the financial sector and ending the recession. However, each speaker has a different agenda. No two have the same priority in mind.

Famously brilliant Larry Summers has not persuaded the president-elect to give him a second tour as treasury secretary. Chagrined, he nevertheless has accepted Obama’s offer to run the National Economic Council. This White House staff job puts him in charge of coordinating the economic recovery plan. He has a deist’s conviction in a clockwork economy that runs efficiently without government intervention. In the event of a recession, the standard Keynesian remedy of federal spending will get the machinery of capitalism ticking again.

The extra dimension of the present situation is a cascade of bank runs, the worst culminating in the bankruptcy of Lehman Brothers in September. The resulting crisis still threatens the survival of the biggest banks on Wall Street. The night before, Summers sent to Obama a long memorandum recommending decisions intended to save Wall Street, stimulate the economy, prevent inflation, and address foreclosures. It described a more dramatic, multidimensional economic problem than any president-elect in modern history had seen since Franklin Roosevelt was elected in 1932. It aimed at delivering as a solution an unemployment rate that is about the same as the level that enabled Bill Clinton to throw George H. W. Bush out of office.

Presumably, in the wee hours, the smart young law professor, a night owl, read the executive summary and skimmed the rest. In the meeting he probably will engage in a disquisition. He will show leadership, confidence in his new team, and calm in a time of trouble.

Summers is ready for the colloquy. He has orchestrated the long meeting, coached the soloists, and arranged the different movements so that the president-elect would approve the whole plan. As critical as are the problems, he will present to Obama a narrow range of policy options. Obama will choose what Summers wants. After the meeting, Summers will dictate the details of implementation to the few aides who constitute the White House-in-formation. While the staff dots the i’s, crosses the t’s, Obama will go on a much-deserved vacation. When the new Congress assembles on January 3, the president-elect’s team will deliver the package to the leadership and ask for rapid approval.

Berkeley economist Christy Romer, utterly new to every aspect of this strange process, will make the opening presentation. She is starting in government at the top for academics in her field—Obama wants her to head the Council of Economic Advisers, the White House’s mini–think tank. She is a recognized expert on the macroeconomics of the Great Depression. She faces the final examination for which she has studied her whole life. She favors reducing unemployment as the principal objective for Obama.

The previous summer, Harvard insulted Romer when university president Drew Gilpin Faust, Summers’s successor, vetoed a prestigious tenure offer made by the economics department. Some said that New Classicists on the Harvard faculty who disapproved of Romer’s New Keynesian thinking had persuaded Faust, a historian, that Romer’s economic models were defective. Now there is more need of Keynesian policy than ever before in the lifetimes of anyone teaching at Harvard or anywhere else. Romer will have the last laugh, if she can persuade Obama to go as high in the range of government stimulus spending as Summers has let her advocate.

Bushy-haired, boyish Tim Geithner, the head of the New York Federal Reserve bank in the Bush administration and Obama’s treasury secretary-designate, will explain in the meeting that the financial crisis has not ended. Geithner considers the meeting to be less important than the others do. In his memoir written years later, he called the gathering “mythic,” meaning that he made important decisions before and after the meeting, and less happened on December 16 than reported.

In the previous 18 months, about half of the biggest Wall Street firms had gone bankrupt or merged to prevent collapse. In September, Geithner had not stopped the Bush administration from letting Lehman go bankrupt, precipitating the biggest financial crisis in the history of capitalism. In the wake of that event, he helped persuade Obama and the Democratic Congress to pass the bank bailout law called the Troubled Asset Relief Program (TARP). In October Geithner and others convinced Sheila Bair, who ran the Federal Deposit Insurance Corporation (FDIC), to guarantee the debts of the Wall Street banks. That same month, Treasury invested $200 billion in big banks. Geithner believes the government’s principal objective is to stop runs on important banks. His intent in Chicago is to quash debate over this strategic decision.

To that end, when it comes his turn to talk, Geithner intends to scare everyone. He will warn of the prospect of a continuing financial crisis that causes a repeat of the Great Depression. He thinks Romer will help him make his case. Then he will persuade Obama to get the half of the $700 billion in TARP money that Congress had withheld from Treasury. That is not a crowd-pleaser, from a political point of view, but Geithner does not care about the ramifications for Democratic politicians. He is committed to reestablishing the status quo ante on Wall Street. He warned Obama that this conviction will be unpopular, except among bankers and business people. Obama picked him anyhow.

Gimlet-eyed Peter Orszag has to outline the president’s budget. The shrinking economy will reduce revenue by a huge amount, and the stimulus will increase spending by a record amount. Named to be director of the Office of Management on Budget, Orszag’s first task is to present Congress with a record-breaking peacetime deficit. He sees the gap between government revenue and spending as the major problem for the Obama administration.

Orszag was one of the more promising novitiates in the deficit-loathing School of Rubin, where Summers was the moral equivalent of dean and cofounder. Adhering to its axioms, Orszag wants the stimulus to be only just big enough to end the recession. As soon as the economy stops shrinking, Orszag thinks the government should constrain spending, making the budget deficit decline. He adheres to the neoliberal postulate that the percentage of the annual federal deficit should be equal to or lower than GDP growth, so that as a percentage of the size of the economy, the aggregate federal debt stays the same or falls.

In Orszag’s view, if Obama runs the total debt too high in the early years of his first term, inflation will ensue and interest rates will climb, possibly creating a second, double-dip recession. Obama then will be running for a second term just as a second downturn occurs: awful for the country, disastrous for Obama. Therefore, the stimulus spending in 2009 and 2010 cannot be big enough to guarantee full employment. The “stimulated” private sector will have to spend what is necessary to reach that level in the fullness of time, even though wages will not rise until, more or less, everyone who can work can find a job.1

Rahm Emanuel is designated chief of staff. He was a Clinton White House staffer, and then as a Chicago congressman was Speaker Nancy Pelosi’s chief strategist for winning the majority in the House in 2006 and increasing the margin in 2008. Emanuel is that guy who begins every discussion with his conclusion. He hates discourse. He likes to say that the Obama team must “put points on the board.” That means persuading Congress to pass as many bills as possible.

Emanuel needs the meeting to end without discord or unresolved issues. He already knows how big the stimulus should be. The economists say a little less than $800 billion will push unemployment below 8 percent by the midterms in 2010. That is good enough given the need to pass the other bills that constitute Obama’s transformational agenda. The economists also say speed matters more than anything. Therefore, the bill cannot contain new ideas. Innovative ideas trouble legislatures. In addition, Obama wants to be a bipartisan leader, and needs Republican votes to avoid filibusters of his healthcare and energy reforms. So Emanuel and Tom Daschle, former Senate majority leader and a de facto co-chief of staff, will not resort to the reconciliation technique that requires only 51 votes in the Senate on a budgetary matter. They will seek 60, the number that precludes filibuster. That requires at least two Republican votes. To get those, the stimulus bill needs to be not much larger than the TARP bank bailout, around $700 billion.

Moreover, Daschle wants to start the healthcare push after the inauguration. That underscores the need to get the stimulus done quickly. The details will be worked out later, after the boss heads to Hawaii. Emanuel will have final say over the package. The December 16 meeting is a formality. It will show the advisers how Emanuel, with Obama’s authority, runs the circus.

Phil Schiliro, a longtime aide to Congressman Henry Waxman, will manage Obama’s negotiations with Congress. He also wants speed. The faster Obama signs laws, the more he increases his political capital. This president plays basketball. Using that sport as a metaphor, the plan is run-and-gun. Shoot quickly, score a lot. The crowd (voters) will cheer. The opposition (Republicans in Congress) will get tired and play less hard. Obama will wear them out.

Emanuel and Schiliro intend to begin talking to the congressional leadership about the economic recovery plan right after the meeting.

Amusing, smart, collegial Austan Goolsbee might carry a grudge into the meeting. Two years earlier, Obama recruited him from the University of Chicago to be chief economic adviser to the campaign. Then, two weeks after the election, Goolsbee suffered the sort of disappointment that princes mete out to courtiers. The president-elect chose Christy Romer, a stranger who had done nothing on the campaign, had probably even supported Hillary Clinton, to run the Council of Economic Advisers. Obama promised Goolsbee that if he would wait his turn he could run CEA in a couple of years, and that the University of Chicago would surely not deny his return to a tenure position after serving in the Obama White House. All that would come true. But now Goolsbee has the less prestigious assignment of dealing with housing issues. The economists on the team believe that housing and unemployment are effects. The meeting is about changing the causes—the financial crisis and falling demand—of economic trouble. Still, Goolsbee has a speaking role on the topic of the housing market.

For two long years Obama’s message strategist, David Axelrod, has advised the candidate hourly, daily, night after night, about how to appeal to voters. Now, after the great victory, he thinks making the American people like the bank bailout and the stimulus is impossible. He worries that explaining truthfully the severity of the economic problem will deepen despair, undercut Obama’s message of “hope and change.” Axelrod wants Obama to show steadiness at the helm in the face of the economic storm. To that end, the president-elect has already publicly guaranteed creating or saving several million jobs. That target may be short of what the situation requires. The economists will give their prediction in a pre-meeting with Axelrod.

For passing legislation on the Hill, Axelrod depends on Emanuel. He held the huppah at Emanuel’s wedding. He trusts the chief of staff to look out for Obama’s best interests vis-à-vis Congress.

Not present, except in the memory and beliefs of the ex-Clinton people, is Robert Rubin. His exquisite touch with prickly egotists enabled him to create loyalists in two of the most byzantine and back-stabbing palaces in the world: Goldman Sachs and the Clinton White House. In both those environments, a growing economy made his job a little easier. Now the converse prevails: a shrinking economy creates poor choices. It is the worst of all welfare policies. It hurts the poor very badly, shrinks the size and security of the middle class, frightens the rich. Public money has to be spent to stop the recession. But the central commandment of Rubinomics is that federal borrowing competes with corporate borrowing, and therefore raises interest rates and reduces economic growth.

Baptist preacher William Miller predicted the Second Coming of Christ would occur on March 21, 1844, and though nothing like that happened then or later, the Seventh-Day Adventist Church still holds that the Second Coming is on its way. Similarly, the members of the School of Rubin in the Chicago meeting see no evidence of inflation, but they continue to believe it is coming. Therefore, they will tell Obama that the deficit-increasing stimulus cannot be too big or last too long.

Others in the Chicago meeting are transition chair John Podesta and Carol Browner, the recently named energy czar. As EPA administrator in the Clinton administration, Browner disputed the neoliberal view that her regulatory agenda innately conflicted with capitalism, and retarded economic growth. Now she is heading back into the White House with the vastly broader mission of reducing all carbon combustion in order to save the world. She knows cap-and-trade legislation will impose a higher cost for power on all business and consumer users. She anticipates that the prioritization of financial stability and job creation will cause the economists again to question the importance of her agenda.

Besides, Browner is a czar in name only. She lacks empire or serfs, an agency or staff. Before the meeting she agreed with Summers to discourage Obama from asking for a plan to build a national transmission network connecting Great Plains clean power to mid-western utility distribution grids. She hopes that in return he will stay quiet while she collaborates with House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to make come true the environmental dream of curtailing greenhouse-gas emissions. Summers wants to save the global economy. She wants to save the planet.

Other advisers in attendance include Jason Furman, with the print on his economics PhD still drying, and Jared Bernstein, who has a doctorate in social welfare. Furman wants to resolve all debates, and create a workable recovery plan. Bernstein is supposed to speak for labor.

The members of the newly assembled team understand that Obama will be assessing them,...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Timeline of Events
• Cast of Characters
• Preface
• Introduction
• 1 To Chicago in the Snow
• 2 As Obama Entered Congress, The Economy Began to Crack
• 3 As 2008 Unfolded, Obama Changed His Team and Themes
• 4 Lehman Changed Everything
• 5 Paulson Snared Obama
• 6 Obama Picked His People and Thus His Policies
• 7 The Courtiers Gathered
• Interlude I: Pitching an Idea
• 8 December’s Dark News
• 9 The Pre-Meeting Memorandum
• 10 A Three-Meeting Day
• Interlude 2: Composing the Stimulus
• 11 “A Rookie Mistake”
• 12 “No Greater Exasperation Than Housing”
• Interlude 3: “I Think That Went Well”
• 13 “Making Healthcare Reform Job One”
• 14 “The Moment When Our Planet Began to Heal”
• 15 A Tale of Two Inaugural Addresses
• Epilogue
• Acknowledgments
• Bibliography
• Index