In the spring of 2012 the Obama campaign decided to go after Mitt Romney’s record at Bain Capital, a private-equity firm that had specialized in taking over companies and extracting money for its investors—sometimes by promoting growth, but often at workers’ expense instead. Indeed, there were several cases in which Bain managed to profit even as it drove its takeover targets into bankruptcy.
So there was plenty of justification for an attack on Romney’s Bain record, and there were also clear political reasons to make that attack. For one thing, it had worked for Ted Kennedy, who used tales of workers injured by Bain to good effect against Romney in the 1994 Massachusetts Senate race. Also, to the extent that Romney had any real campaign theme to offer, it was his claim that as a successful businessman he could fix the economy where Obama had not. Pointing out both the many shadows in that business record and the extent to which what was good for Bain was definitely not good for America therefore made sense.
Yet as we were writing this review, two prominent Democratic politicians stepped up to undercut Obama’s message. First, Cory Booker, the mayor of Newark, described the attacks on private equity as “nauseating.” Then none other than Bill Clinton piped up to describe Romney’s record as “sterling,” adding, “I don’t think we ought to get into the position where we say ‘This is bad work. This is good work.’” (He later appeared with Obama and said that a Romney presidency would be “calamitous.”)
What was going on? The answer gets to the heart of the disappointments—political and economic—of the Obama years.
When Obama was elected in 2008, many progressives looked forward to a replay of the New Deal. The economic situation was, after all, strikingly similar. As in the 1930s, a runaway financial system had led first to excessive private debt, then financial crisis; the slump that followed (and that persists to this day), while not as severe as the Great Depression, bears an obvious family resemblance. So why shouldn’t policy and politics follow a similar script?
But while the economy now may bear a strong resemblance to that of the 1930s, the political scene does not, because neither the Democrats nor the Republicans are what once they were. Coming into the Obama presidency, much of the Democratic Party was close to, one might almost say captured by, the very financial interests that brought on the crisis; and as the Booker and Clinton incidents showed, some of the party still is. Meanwhile, Republicans have become extremists in a way they weren’t three generations ago; contrast the total opposition Obama has faced on economic issues with the fact that most Republicans in Congress voted for, not against, FDR’s crowning achievement, the Social Security Act of 1935.
These changes in America’s political parties explain both why there has been no second New Deal and why the policy response to the prolonged economic slump has been so inadequate. The partial capture of the Democratic Party by Wall Street and the distorting effect of that capture on policy are central themes of Noam Scheiber’s The Escape Artists: How Obama’s Team Fumbled the Recovery, an inside account of Obama’s economic team from the early days of the presidential transition to late 2011.
Scheiber starts with the influence Wall Street exerted over the assembly of that economic team. In its early stages, Scheiber tells us, Obama’s campaign relied for policy advice on “obscure academics, contrarian gadflies, and past-their-prime bureaucrats,” like Austan Goolsbee, a young economics professor from the University of Chicago, and Paul Volcker, the octogenarian though still vigorous former chairman of the Federal Reserve. But by September 2008, another economic group had formed and begun competing for influence, composed of “well-heeled insiders. Most [of them] had worked for former Clinton Treasury secretary Robert Rubin.” Rubin had been a partner at Goldman Sachs before joining the Clinton administration; after leaving, he became a director and counselor, and then chairman, of Citigroup.
Soon, the latecomers had completely superseded the early team. For example, the person charged with vetting potential economic hires was Jason Furman, a seasoned Washington economist who ran the Hamilton Project, a neoliberal think tank founded by Rubin and funded by Democratic-friendly financiers. Mike Froman, an aide to Rubin during his tenure as treasury secretary who then followed Rubin to Citigroup, was the personnel chief of Obama’s transition team. It was he who put forward Larry Summers and Tim Geithner as the leading candidates for treasury secretary.
Summers, the Harvard economist and former undersecretary of the treasury under Robert Rubin, who then succeeded him as treasury secretary, as well as being an adviser to a Wall Street hedge fund, would become Obama’s top economics aide as director of the National Economic Council. Geithner, who had been Summers’s lieutenant while at the Clinton Treasury and was later chairman of the Federal Reserve Bank of New York, had been one of three people who had acted to save the country’s biggest banks—on terms congenial to the banks—during the fall of 2008. As Scheiber writes, “By putting Mike Froman in charge of hiring, Obama was, in effect, choosing to staff his administration with insiders and establishmentarians.”
The dominance of Rubinites in the new administration shocked many progressives, since for many the Clinton-supported repeal of the Glass-Steagall Act, advocated by Robert Rubin but opposed by Paul Volcker, symbolized the extent to which the financial crisis of 2008 was hatched in the overly friendly relationship between the Clinton administration and Wall Street. It’s true that Glass-Steagall, a Great Depression–era law that forbade the mixing of securities trading and accepting FDIC-insured deposits under the same corporate roof, wouldn’t have prevented the 2008 implosion of Wall Street. Instead, it was extraordinarily high levels of leverage at investment banks like Lehman and Merrill Lynch, as well as the holding of huge portfolios of toxic subprime mortgages by deposit-taking banks like Bank of America, that were the fuel for the conflagration. But progressives were right to feel that Wall Street had been dangerously underregulated for too long and that the entire country was now paying the price.
Yet those concerns fell on deaf ears within the new administration. As Scheiber recounts, when one Democratic senator protested that the team headed by Geithner and Summers had been too sympathetic to Wall Street during the 1990s, Obama dismissed the concerns, stating that “he needed people he could count on in a crisis. Besides,…they had changed.”
Was it all some kind of conspiracy? No—as Scheiber explains, it was less purposeful and more complicated than that. Partly it was Obama’s need for experienced hands and immediate credibility in the middle of the worst financial crisis since the Great Depression. Partly it was due to Obama’s insouciance about political optics. But it’s also clear that Obama’s personality and temperament played the crucial part in aligning his fortunes with Rubinites; as Scheiber acutely observes, Obama and Geithner bonded over similar childhoods as ex-pats and an understated, self-deprecating style that avoided direct conflict. No doubt Obama’s all-star economic team gave him the “intellectual affirmation” that Scheiber notes “he craved.”
But while the team may have given Obama intellectual affirmation, it didn’t give him very good advice. In the end, Obama’s response to the financial crisis was both lopsided and inadequate: Wall Street received a lavish bailout, with remarkably few strings attached, while workers and homeowners were let down by radically underpowered plans for stimulus and debt relief.
True, not all members of the team got it wrong. We now know in particular that Christina Romer, the Berkeley professor appointed to head Obama’s Council of Economic Advisers, called from the beginning for a much larger economic stimulus than the administration ever proposed. But Romer was sidelined and it was Larry Summers—a person not shy about displaying his brilliance—who had Obama’s ear. In principle, that needn’t have made much difference; when wearing his academic hat, Summers espouses Keynesian economic views not noticeably different from Romer’s (or ours). But Summers, rather than passing on straight economic analysis, tried to show his political astuteness about what Congress would accept, and as a result underplayed the case for a bigger stimulus.
But it is Tim Geithner, Obama’s treasury secretary, who appears, even more than Obama, as the decider in this saga. In contrast to Summers, whom Scheiber portrays as a flexible, reformist Rubinite, willing to alter his views in the face of evidence, believing in particular that shareholders of bailed-out banks could and should pay more to taxpayers, Geithner is described as a doctrinaire Rubinite who viewed his primary task as one of restoring financial market confidence, which in his mind meant doing nothing that might upset Wall Street.
Thus, while a financial bailout was undoubtedly necessary, Geithner bucked Summers and even Obama by engineering a bailout in which taxpayers assumed all the risk but got nothing in return; in which Goldman Sachs’s speculative trades against AIG, which pushed AIG over the edge, were honored in full and paid from the government’s bailout of AIG; and in which the plan for regulating derivatives was, as one lobbyist said, “the plan [derivatives] dealers had come forward with.” There would, of course, be no discussion of blame, no hint that the bankers had done a bad thing by putting the economy in such a predicament. That would, after all, undermine confidence.
How did Geithner manage to dominate policy so completely? Partly it was his skill at inside politics; even when he couldn’t win an argument outright he would win by other means. Often he would simply wait people out; this was his tactic with Rahm Emanuel, knowing that Emanuel’s manic attention would eventually turn elsewhere. And crucially, Geithner was enabled by Obama’s unwillingness to break stalemates between his aides. So as public rage mounted over the bank bailout, David Axelrod, Robert Gibbs, and Rahm Emanuel turned to Geithner and pleaded with him to make bank shareholders pay some price for the government rescue of the banking sector. Geithner simply refused to yield, making the specious argument that banks had already paid a price by being forced to raise capital from the market. As Scheiber accurately points out, this ignored the fact that by backstopping the banks during their self-inflicted implosion, the US government effectively gave them an insurance policy worth billions of dollars. In the end, Geithner won.
If Geithner is the active designer of the Wall Street bailout, Obama is the passive enabler of Republican intransigence. Scheiber describes how, time and time again, Obama’s reflexive search for bipartisanship handed the advantage to the Republicans. Scheiber observes that “in Obama’s mind, ‘partisan’ equaled ‘parochial,’ or even ‘corrupt,’” leading to “making huge concessions before the [stimulus] negotiation had even started,” that Obama’s hunger for acceptance through bipartisanship was “deeply confused,” and, perhaps most damningly, that in contrast to Obama’s approach, “partisan muscle-flexing may very well serve the public interest, since there’s no other way to pass legislation.”