The Escape Artists

How Obama's Team Fumbled the Recovery

Noam Scheiber

• Publisher: Simon & Schuster
• Year: 2012
• ISBN:
  9781439172421
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

FACING THE WORST ECONOMY SINCE THE 1930S, PRESIDENT BARACK OBAMA HIRED A CRACK TEAM OF ESCAPE ARTISTS: financial wizards who had pulled off numerous white-knuckle getaways during the Clinton era and who were ready to do it all over again. Three years later, with the economy still in a rut, it's clear that they fell far short. This is the inside story of what went wrong. The Escape Artists features previously undisclosed internal documents and extensive, original reporting from the highest levels of the administration. Star White House journalist Noam Scheiber reveals the mistakes and missed opportunities that kept the president's pedigreed team from steering the economy in the right direction. He shows what responsibility the president bears for those missteps, what bold actions his brain trust refused to take despite its preternatural confidence, and how the White House was regularly outmaneuvered by Republicans in Congress. Tracking the administration's efforts deep into the fall of 2011, The Escape Artists provides a gripping look inside the meeting rooms, in-boxes, and minds of the men who tried to manage the defining crisis of the Obama presidency: how the very qualities that made these men and women escape artists in the 1990s ultimately failed them. *** THREE YEARS INTO THE OBAMA PRESIDENCY, THE UNEMPLOYMENT RATE WAS PAINFULLY HIGH, THE GAP BETWEEN RICH AND POOR HAD WIDENED, AND THE STIMULUS HAD NOT DONE ENOUGH TO BRING JOBS BACK. WHAT WENT WRONG? A PRESIDENT WITH OTHER PRIORITIES... Barack Obama hadn't run for president just so he could clean up someone else's mess, however urgent the task. He'd run for president to usher in once-in-a-generation achievements like health care reform—"to change the trajectory of America." Timothy Geithner remarked to President-elect Obama that "your signature accomplishment is going to be preventing a Great Depression." Obama's response was slightly jarring. "That's not enough for me, " he said. It dawned on Geithner that he and his colleagues were a sideshow rather than the main attraction. "If you don't do that, nothing else is possible, " Geithner protested. "Yeah, " Obama repeated, "but that's not enough." AN ECONOMIC TEAM RELUCTANT TO TAKE BOLD ACTION... David Axelrod was preparing Christina Romer, Obama's chief economist, for a Sunday talk show. Many experts were voicing doubts about the size of the original package, and so Axelrod asked, "Was the stimulus big enough?" Without hesitating, Romer responded, "Abso-f---ing-lutely not." She said it half-jokingly; Axelrod did not seem amused. AND A BRAIN TRUST THAT BELIEVED IT KNEW BETTER... It was the worst of all worlds for the Obama administration: a country that took one look at the languishing economy and another at the recovery on Wall Street and concluded that its government had put big banks ahead of ordinary people. Generously, the S&P officials didn't point out any of this. Instead, the leader of the group confessed that the agency was mostly concerned about the prospects for bipartisan compromise. At this, Geithner became dismissive. His message was unmistakable: TRUST US, WE'VE DONE THIS BEFORE.

1

THE REUNION

Austan Goolsbee was on a campaign swing through Montana when he got a call from Obama headquarters. It was September 18, 2008, three days after the investment bank Lehman Brothers had failed, thrusting the financial world into an advanced state of panic. Hank Paulson, the Treasury secretary, was preparing a $700 billion plan to buck up the surviving banks, and Team Obama wanted to talk it over the next morning—in Florida. “Okay, great, but I’m in Helena, Montana,” said Goolsbee, a thirty-nine-year-old adviser who taught at the University of Chicago . “How am I going to get to Miami by 9 am?”

By that afternoon, Goolsbee was on a flight to Salt Lake City, where he caught a connection to Las Vegas. A young staffer had turned up a red-eye from Vegas to Miami, and soon Goolsbee found himself sprinting from one side of the airport to the other so as not to miss his only chance at crossing the country overnight. When he finally stepped off the third flight the following morning, his clothes had the starchy texture of caked-on sweat. Goolsbee did what he could to freshen up, having exhausted his supply of clean clothing: he shaved off his stubble and splashed some water on his face.

Goolsbee had been Obama’s top economic adviser ever since the candidate first ran for U.S. Senate in 2004, but the relationship had been something of an accident. The campaign first contacted the Harvard economics department in search of policy advice. But it had gotten precisely nowhere—the Harvard faculty wasn’t exactly in the business of advising obscure midwestern state senators. Finally, one professor suggested trying someone local and passed along Goolsbee’s name.

Obama had been forced to make do all over again once he started running for president. His rival, Hillary Clinton, was only eight years removed from the White House and had a whole administration-in-waiting at her disposal. Obama had wanted to offer the job of chief economic adviser to a brand name like Alan Blinder, a Princeton professor whom Bill Clinton had appointed vice chairman of the Federal Reserve. But when the campaign solicited recommendations from knowledgeable policy wonks, it was advised that no one of Blinder’s stature would accept.

So Obama was left to choose from the people who, for whatever reason, had been either cast out of the establishment or never admitted in the first place—a collection of obscure academics, contrarian gadflies, and past-their-prime bureaucrats. Goolsbee, who stayed on as his economic aide, was emblematic of the group. But he was hardly the only one. There were ex-Clintonites like Robert Reich, the onetime labor secretary who had been a liberal voice of dissent within the administration; and Dan Tarullo, a Georgetown law professor who’d served in the Clinton White House but was never at ease with its attentiveness to Wall Street. There were aging eminences like Paul Volcker, the former Fed chairman revered for besting inflation in the 1980s; and Bill Donaldson, who’d been squeezed out of his job running George W. Bush’s SEC for trying to tighten the screws on hedge funds and mutual funds.

As a group, the Obama wonks were united more by their outsider status than any coherent set of views. Goolsbee was cut in the mold of an engineer, constantly tweaking and tinkering to solve workaday problems, not some grand ideologist or high priest of social criticism. The epitome of a Goolsbee proposal was a scheme he dubbed the “automatic tax return,” in which the IRS would send people a filled-out tax return that they could simply sign and mail back.1 Reich, by contrast, was an orthodox liberal known for his treatises on the human costs of globalization.

Yet there was something about the grab-bag character of the team that actually suited Obama. What began as a matter of necessity ended up playing to his nonideological style. Though Tarullo and Volcker subscribed to different schools of financial regulation, Obama had taken the best ideas from each and worked them into a single, formidable speech.2 One aide recalled that Obama was never more annoyed than when sitting across from three experts who all had the same views.

By September 2008, however, Obama had not one but two economic teams jostling for position within his campaign. And if the first was a ragtag bunch of quirky outsiders, the second was composed of well-heeled insiders. Most had worked for former Clinton Treasury secretary Robert Rubin at one point or another and largely echoed his views on the importance of balanced budgets and free trade. Perhaps even more than that, though, the bond the Rubinites shared was self-assurance: the comfort of having performed well at the highest altitude of government.

Around the same time Goolsbee was dusting himself off at the airport in Miami, Rubin and Larry Summers, another former Treasury secretary, were descending from the skies aboard a private jet that Rubin had procured. They sent one of the young campaign aides who greeted them to collect their luggage. To them, the appearance in Miami was a bit of an audition, but one in which the candidate was auditioning for the advisers as much as vice versa. Rubin liked Obama personally and thought he showed promise, but had doubted he was ready to be president. Earlier in the campaign, he’d commented to friends that Obama needed to put some meat on his policy positions.

Once they were all together in Miami, Obama and his brain trust spent more than an hour chewing over which portions of the financial system would need government backing and which could fend for themselves. It was here that the candidate struck Rubin and Summers as impressively fluent. After the meeting ended, they mused about how they would grade his financial know-how, and both were pleasantly surprised to find themselves in agreement: A or A-plus.3 Obama had won over the establishment.

Six months earlier, in March 2008, Larry Summers had sat down at an unglamorous Italian restaurant on the west coast of Florida with several of his former colleagues, including Gene Sperling, who’d been Clinton’s top White House economic adviser, and Lee Sachs, a former assistant Treasury secretary. The meal was part of an annual pilgrimage to the Nick Bollettierri Tennis Academy in Bradenton, Florida, that Summers and Sachs had inaugurated after leaving office in 2001.4 On this occasion, the conversation turned naturally to the Democratic presidential primaries, where Obama was busy pressing his advantage against Hillary Clinton. Though not everyone in the group had actively supported Clinton, most were identified with her or her husband. Some worried that they’d be shut out of the new administration as a result.

By June, however, their prospects suddenly improved. From time to time during the previous few months, the Obama high command had fretted about the strength of its economic team. Goolsbee was a first-class intellect, no doubt. His chemistry with Obama was evident and his loyalty beyond question. But he was not the least bit expert in distilling economic know-how into the basic currency of a campaign—the daily run of talking points and policy pronouncements that respond to ever-changing events while passing muster with the knuckle-rappers in the media. Goolsbee was an economist. It was becoming increasingly clear that the campaign also needed an economic policy broker.

The person the Obamans eventually landed for the job was arguably the best in the business, a Harvard-trained, Washington-seasoned economist named Jason Furman. Furman had played a similar role in the presidential campaigns of John Kerry and Al Gore. By 2008 he was heading the Hamilton Project, the economic research and advocacy group created by Rubin and funded by a circle of Clinton-friendly financiers. After Obama effectively clinched the nomination in late May, Furman signed on to the campaign.

The timing was fortunate. Within six weeks, it was hard not to see that there was something deeply amiss in the markets. Supposedly staid, low-risk banks were crumbling—on July 11, the savings and loan institution IndyMac became the fourth largest bank to fail in U.S. history. By late summer the rest could borrow money only on exorbitant terms. Those who’d had the misfortune of making a subprime loan or buying a subprime mortgage security, a group that included just about every major firm on Wall Street, suddenly noticed an ugly hole where they’d parked it on their balance sheet. The turmoil was illustrated in early September by the spectacle of the George W. Bush administration taking over the two mortgage-munching behemoths, Fannie Mae and Freddie Mac. But then perhaps the only thing more disconcerting than watching the theologically pro-business Bushies nationalize a shareholder-owned company was watching them not do it. Less than two weeks later, they set off a global financial panic by letting Lehman Brothers collapse. It fell to Furman to calibrate the campaign’s response to each grim turn of events.

Furman had been close to Rubin and Summers dating back to the Clinton White House, where he’d toiled as a junior economist. Before long, Obama and his senior adviser David Axelrod suggested that Furman press them into a more formal role. This in itself was hardly surprising. A presidential nominee will almost inevitably turn to party eminences in a crisis, if only to reassure an anxious public that he is receiving the wisest counsel. And those elders will almost always feel an obligation to assist him, whether or not they have a personal connection to the campaign.

The practical upshot of having Furman was more significant: Team Clinton was now in. Furman ensured that the two former Treasury secretaries would be incorporated directly into the campaign’s nerve center, rather than languish as overqualified props. Goolsbee had been consulting with Summers every few weeks; not long after Furman joined Team Obama, he and Summers began speaking almost every day. Furman’s deputy, Brian Deese, spoke with Rubin nearly as often.

The Furman connection also brought Summers and Rubin into close proximity with Obama himself, at least once the tremors in the financial system erupted. Every few days, Goolsbee and Furman would convene a conference call to discuss the latest jaw-dropping development and how the campaign might respond. Beyond Volcker, only Summers and Rubin had standing invitations to the call, and Summers soon enjoyed a kind of first-among-equals status. It was his job to frame the issue of the day for the candidate before the discussion began. More so than can be said of anyone else, the future president would see the crisis unfold through Larry Summers’s eyes.

On Wednesday, November 12, just over a week after capturing the presidency, Barack Obama sat down for a meeting in his transition headquarters in downtown Chicago. It was only the second formal discussion of how the president-elect would fill his cabinet. But, with the economy collapsing, the banks between rounds of government bailouts, and the Dow Jones down 3,000 points since the summer, Obama hoped to settle on a Treasury secretary.

Most of the advisers in the room would have been familiar to any casual observer of the recent election: David Axelrod, the president-elect’s political guru; Valerie Jarrett, his longtime friend–cum–campaign aide; Rahm Emanuel, his incoming chief of staff. Even those advisers less visible to the poll-consuming public, like his counselor and Senate aide Pete Rouse, were natural participants in a meeting of such consequence. But there was at least one person whose presence wasn’t immediately comprehensible: a slightly balding, slightly thickening man with bags under his eyes and a voice as smooth as chamomile. His name was Michael Froman.

Anyone who’d heard of Mike Froman at this early date in the career of Barack Obama was no mere political junkie but a devoted student of Obamanology. Officially, Froman (not to be confused with Jason Furman) was the transition’s personnel chief and one of twelve members of its advisory board. Unofficially, Froman was an influential liaison to Wall Street and a trusted consigliere of Obama’s. The two men had known each other since law school at Harvard.

One of the crowning achievements of Froman’s tour as Obama’s human resources director was a lengthy memo suggesting candidates for every top economic job in the future administration. The memo identified two front-runners to lead the Treasury Department: Larry Summers and Tim Geithner, a onetime Summers lieutenant then serving as president of the Federal Reserve Bank of New York. If the president-elect wasn’t satisfied with these options, Froman offered him two more: Jamie Dimon, CEO of the massive bank JP Morgan Chase; and Jon Corzine, the former U.S. senator and CEO of Goldman Sachs. The names were revealing, if hardly surprising: some parts Washington, some parts Wall Street, and, in the case of Corzine, some parts both. Which is to say, precisely who you’d expect to find on a list from Mike Froman.5

Froman had been a young aide to Rubin in the early nineties, when the former Wall Street icon served as Clinton’s top White House economic adviser. After Rubin took the helm at Treasury in 1995, Froman joined him as a deputy assistant secretary and later became his chief of staff. In retrospect, Froman had all the hallmarks of a Rubin man, that combination of pragmatism, brains, and pedigree. He was always ready with the insight you’d been groping for, the fact that had eluded you. When the Russians teetered on default in 1998, Summers, then Rubin’s deputy, asked his troops about the urtext of financial crises, Charles Kindleberger’s Manias, Panics, and Crashes. “Has anyone here actually read this book?” the deputy secretary wondered. Froman was the only one who raised his hand.

By the time Froman and Obama were reacquainted in 2004, their paths had thoroughly diverged. Froman, who’d followed Rubin again when the Treasury secretary left for Citigroup in 1999, had remade himself into a financier. Obama was chasing higher office from the purgatory of the Illinois state legislature. Still, Froman knew a good investment when he saw one. He brought his old classmate to Citigroup to introduce him to Rubin. And, once Obama arrived in Washington, Froman organized an economics tutorial for him with Rubin, Summers, and several other Clinton Treasury alumni.

By 2007, Froman had thrown himself into the cause of Obama’s presidential prospects. He canvassed the hedge fund world and vouched for the young senator across the Upper East Side. Obama, in turn, brought his former classmate into his inner circle, giving him a job with enormous influence over his future administration. In the process, Obama was making a highly consequential decision. By putting Mike Froman in charge of hiring, Obama was, in effect, choosing to staff his administration with insiders and establishmentarians.

Obama had always had a healthier respect for the establishment than the typical insurgent candidate. Early in the primaries, he’d leaned on his staff to procure white-shoe authorities on the subject matter du jour. “What he wants to know is that he’s really talking to experts in the field,” a staffer told one academic. “When you go see him, you know, make it clear that you’re an expert.”6

Unlike Bill Clinton, Obama wasn’t socially needy. He didn’t seem to care whether he had a friend in the world. But he craved intellectual affirmation. For example, he had a habit of prompting his aides to acknowledge his wisdom and foresight. “Whose idea was that?” he’d ask, when everyone knew it was the boss’s. During one staff meeting in the summer of 2008, Obama used the refrain so many times Axelrod was moved to groan, “Can you imagine four more months of this?”

To an outsider, it might have seemed suspicious that Froman had listed his two former Clinton colleagues as the leading candidates for Treasury. In fact, there was a relatively benign explanation: with Wall Street practically folding up on itself, Obama had told his transition staff he didn’t want mere market experience at the top of his economic team; he wanted public officials practiced in the art of stanching financial crises. As a practical matter, this winnowed the Treasury short list to the most inside of insiders—the handful of Clinton alumni who had defused the global financial panics of the 1990s.

Though Obama and his aides would still have to choose between Geithner and Summers, there were few policy differences between the two, and certainly no ideological rifts. In any case, Obama planned to offer both men jobs, and so the question was really who sat where. The basic path had effectively been chosen.

When Obama opened the floor to discussion at that early transition meeting on November 12, the considerations were almost entirely tactical and personal, not substantive. Emanuel and Axelrod weighed in for Summers. The former secretary was known to the markets and the public, they argued, and had been tested under the klieg lights. His presence would be reassuring from the get-go.7

John Podesta, the former Clinton chief of staff then serving as head of the transition, chimed in on Geithner’s behalf. He believed Geithner and Obama would mesh better personally. Ironically for a former Clinton hand, he also worried about a glut of officials so easily identified with the former president, lest the man from Change produce an administration full of retreads. Jarrett favored Geithner for similar reasons. She’d also received e-mails and phone calls from Obama supporters unnerved by Summers’s controversial Harvard presidency, which he’d resigned in 2006 under pressure from the faculty. Of particular concern was his suggestion, during a talk he’d given as president, that genetics might help explain the paucity of women in the top ranks of the science and engineering professions.8

Most important of all, Obama himself was unconvinced by the case for Summers. He didn’t share Jarrett’s concerns about the Harvard debacle. And there was no denying Summers’s analytical brilliance. He’d been one of the youngest ever tenured professors at Harvard and later won the John Bates Clark Medal, awarded to the most outstanding American economist under forty and often a prelude to a Nobel Prize. But Obama was skeptical in other ways. Emanuel and Axelrod seemed to think the mere act of appointing a familiar face could help defuse the economic crisis. Yet if familiar faces were what the country wanted, Obama himself wouldn’t be there. Experience mattered, but it was no substitute for p...

Table of contents

• Cover
• Back Cover
• Description
• Author Bio
• Title Page
• Copyright Page
• Dedication
• Contents
• Prologue
• Chapter 1: The Reunion
• Chapter 2: The Big Ideas Project
• Chapter 3: “People Will Think We Don’T Get It”—Larry Summers
• Chapter 4: The Operator
• Chapter 5: Wildebeests And Cheetahs
• Chapter 6: The Succession Fight
• Chapter 7: The Fallacy
• Chapter 8: Bait and Switch
• Chapter 9: The Big Diversion
• Chapter 10: The Purist
• Chapter 11: The Rogue
• Chapter 12: A Case of Clientitis
• Chapter 13: The Surrender
• Chapter 14: Underwater
• Chapter 15: Snookered
• Chapter 16: The Wrong War
• Epilogue
• Acknowledgments
• Author’s Note on Sources
• Notes
• Index
• Footnotes