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“Obama’s Newfound Populism: All Hat, No Cattle”

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By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

President Obama is taking a sharp, populist tone with Wall Street and scolding the ways of Washington. Once again, he is looking to the Senate to follow the House and pass a top legislative priority: sweeping financial regulatory reform. It might feel satisfying to hear the President criticize “reckless”, “fat cat” bankers, but the financial reform legislation passed by the House last Friday (and lauded by the President) provides little incentive to change their behavior. In reality, populism — with nothing of substance behind it — is just cynical posturing designed to mask genuine failure. To use an expression favored by his predecessor, this president is once again showing himself to be all hat, no cattle.

Appealing to the peanut gallery at this stage is an insult to the voters’ intelligence. The most telling comment on the latest reforms came from the stock market: Bank stocks ended the day higher last Friday (when the House bill was passed to great fanfare), with the KBW Banks index slightly outperforming the benchmark Dow Jones industrial average.

At its most basic level, a bank is an entity that has a reserve account at the Fed, which makes loans and takes deposits. That is its primary public purpose, and we should not be allowing activities which undermine this central function, especially seeing as it is the government which guarantees the public’s deposits via the FDIC. (As an aside, even though the government creates all reserves and guarantees deposits, we do not want it to be directing lending activity because, as “Winterspeak” notes, “we do not want the Government to make credit decisions, they are too likely to dole out money to politically connected constituencies, while starving worthwhile, but unconnected borrowers.”

However good the political optics of resorting to demonization of Wall Street, the legislation itself does nothing to recognize that the behavior criticized is a direct consequence of incentives built into the current institutional structure. It completely misses the point because it does nothing to ban activities which were at the heart of the crisis and which will likely be perpetuated as a consequence of the new legislation. All the new legislation does is institutionalize tax payer bailouts and, in so doing, continues the process of privatizing profits and socializing losses. Insolvent institutions have a habit of “betting the bank” through control fraud (Bill Black’s term for CEOs using the company as a fraud vehicle) and the new legislation will not prevent this.

Even positive aspects of the bill, such as the establishment of the Consumer Financial Protection Agency, were significantly watered down. New Democrats — the people we used to call “Republicans” — won concessions that give federal regulators more scope to preempt state consumer-protection laws deemed to “significantly interfere with or materially impair a national bank’s ability to do business.” The change was sponsored by Congresswoman Melissa Bean, the most bought and paid for member of the House (not an inconsiderable political achievement amongst our current political profiles in courage). Bean justified the change on the basis of having “robust national standards and enforcing them uniformly”, which sounds good until one considers the history of federal regulators, none of whom have historically moved when they plainly should have done so. How many federal regulators do you recall actually blocking the most egregious excesses in the mortgage market over the past 15 years? Preventing the states from moving proactively means that we will likely repeat the experience of the 1990s. Historically, the reform impetus has emanated from the states, not the federal government — Governor Eliot Spitzer’s administration being a prominent illustration.
More and more voters are beginning to believe this façade of reform is deliberate — a cynical act of kabuki theatre by the President to mask his own reticence to deal with the problem in an honest manner. It was clear to many of us that the president may not have been serious about reform when he picked Tim Geithner and Larry Summers as the leaders of his economic team a year ago, and essentially relegated any genuine progressive to the Cabinet equivalent of Siberia, as Matt Taibbi recently highlighted.

Yes, Summers and Geithner both have ample experience. But does that mean that they were qualified to take on the positions they were granted in the Administration? I suppose that depends on whether you think a doctor who botched your surgery ought to be given the role for the next one, simply because he has greater familiarity with your body than another surgeon.

Some on the left have hit Taibbi very hard for the attacks on Obama. Matt is no conservative, and more importantly, he is correct: Taibbi calls the President what he is, a sweet talking man who cannot fulfill one single promise he made to the public to get elected. So we have this incompetent financial reform bill, which will not place any limits on another systematic collapse. We have a health bill with no means of sensibly restraining cost pressures within the private health insurance industry. We are still fighting two wars, one of which is being escalated. The economy is still struggling and jobs are being lost.

Far easier to resort to cheap populism than to actually do something about it. If the President were serious, he would be pointing out that the bankers have been undercutting every effort at reform, and have been paying off Congress to put loopholes into all legislation. If he were genuinely upset, he would be channeling the country’s anger constructively, by calling on the population to take to the streets in mass protests against Wall Street with a view to shutting down the biggest banks and breaking their power once and for all. Of course, the President would never do anything so “irresponsible”. Far better to throw a few bones to the peasants and hope that the appearance of reform pacifies them.

The economist Hyman Minsky argued that the Great Depression represented a failure of the small-government, laissez-faire economic model, while the New Deal promoted a Big Government/Big Bank highly successful model for capitalism. The current crisis just as convincingly represents a failure of the Big Government/Crony Capitalist model that promotes deregulation, reduced oversight, privatization, and consolidation of market power. Yet the very people who have shredded the New Deal reforms and replaced them with self-supervision of markets are the champions of today’s financial “reform”.

As appealing as the story of Paul on the road to Damascus might be, there is certainly no evidence of any Damascene conversion here amongst the policy makers of the Obama Administration. It’s business as usual, along with the championing of monetary and fiscal policy that is biased against maintenance of full employment and adequate growth to generate rising living standards for most Americans.

We must return to a more sensible model. We need enhanced supervision of financial institutions with a financial structure that promotes stability by aligning the banks’ activities with public purpose, rather than abetting speculation and then bailing the financial sector out after the fact. President Roosevelt proved that we could reform the financial system, rescue homeowners, and deal with the unemployed even as we mobilized and then fought World War II. By contrast, this is an Administration that defines reform as muddled compromise within a profoundly broken polity.

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19 comments

  1. john newman

    Nice work over at the Times Blog: something must have gone wrong in their lack-of-quality control. Good work from Yves and Ed.

  2. Matt Franko

    Marshall,
    I have been thinking of Paul lately too…taking lessons from his resilience.

    Keep up the good work!

  3. Doc Holiday

    Ahhh hahahah… To use an expression favored by his predecessor, this president is once again showing himself to be all hat, no cattle.

    Great stuff there Yves! The whole enchilada was very well done!!!

    Here are a few Texan tid-bits … bawhahahaha…

    Busier than a cat trying to cover up crap on a marble floor

    He’s got a big hole in his screen door.

    If dumb was dirt, he’d cover about an acre

    He’s riding a gravy train with biscuit wheels.

    “You can’t get lard unless you boil the hog”

    Never kick a fresh turd on a hot day.

    If you find yourself in a hole the first thing to do is stop diggin’.

    There’s two theories to arguin’ with a woman. Neither one works.

    A smart ass just don’t fit in a saddle

    * Many thanks to Obama for this humor!

    Also see my other source: http://www.coolslang.com/

  4. But What do I Know?

    This is good stuff and right on. Obama is starting to remind me of the “first black mayor” politician (Kurt Schmoke, Wilson Goode, David Dinkins, etc.) who appeals to minorities and progressive whites as a force for change but is really in office to maintain the status quo and the entrenched political corruption (I’m not saying that those politicians were personally corrupt, just that they didn’t do anything to change it). The “first black mayor” will make some superficial gestures at reform and begin some highly publicized and well-meaning social programs (“Baltimore, the city that reads”) but essentially he will deflect criticism from the left by posing as their champion (and have the added ability to play the race card against white intellectuals.) After a few years the FBM moves off to some comfortable corporate and non-profit boards to serve as a token minority and live out his comfortable existence, having done nothing to fix any structural problems or improve the lives of the people who voted for him (but even more for change).

    Obama didn’t create the problems, but he certainly isn’t doing anything to fix them. . .

    Please don’t take this as racist–it’s just that for the con to work it needs a minority face. I suppose the same dynamic prevailed with ethnics in the nineteenth-century city (Irish in Boston and NYC, perhaps).

  5. Doug Terpstra

    Bravo for a killer article. “…cynical posturing designed to mask genuine failure.” Great Kabuki Theater indeed, but it’s a re-run, and the greasy popcorn makes me heave.

    Anyone catch MSNBC’s Dylan Ratigan this morning with Eliot Spitzer? They torched this live-birth abortion bill—and the TARP bailout “repayment” shell game. Withering!

    Public purpose in economic regulation — a revolutionary concept! If this “sweeping financial regulatory reform” is anything like weeping healthcare reform, watch out for corporatization of Social Security. If everyone can be forced to buy for-profit health-rationing, then why not also funnel FICA straight into the drooling maw of banksters and hedgehogs? Surely that can be appended to this bill or the next; Bush III will almost certainly sign it.

  6. JTFaraday

    “All the new legislation does is institutionalize tax payer bailouts and, in so doing, continues the process of privatizing profits and socializing losses. Insolvent institutions have a habit of “betting the bank” through control fraud (Bill Black’s term for CEOs using the company as a fraud vehicle) and the new legislation will not prevent this.”

    In other words we are institutionalizing fraud, the gangster state, and Obama the “constitutional scholar” is blessing it.

    Nice.

  7. Eric

    I agree with practically everything I read here, but at the penultimate sentence the author invokes the image of resucing homeowners. I’m all for enforcing fraud laws, but what else makes any sense? Prices have dropped and continue to drop, both on purchases and, in many markets, on rentals. I lost the equivalent home equity as everyone else, but still have a good amount of equity, so is anyone agitating to cut my interest rates, reduce my principal, extend my loan? Heck no….and that is the right answer. At a time when housing options after a foreclosure are ample, what’s the problem with the various levels of government taking a pass on complicated and ineffective measures to rectify situations that the contractual parties could, if they both wanted to, handle. It is the prospect of federal money that is slowing down more serious offers of principal reductions – why give away today something some other entity may give you tomorrow?

    1. Patriot

      There will be no writedowns because
      1) Mortgage servicers make money through the foreclosure process
      2) Often the servicer has no contact with the investors who actually own the loan. The servicer likely has no ability to modify the loan.
      3) Investors took out insurance on the mortgages. When it defaults, they collect the insurance. Lots defaulted, so lots of insurance payouts….guess who is covering for the insurance payouts? You and me, since we bailed out AIG.

  8. charcad

    The economist Hyman Minsky argued that the Great Depression represented a failure of the small-government, laissez-faire economic model

    That model was getting ever further out of gear with the physica technology of the era, which favored extreme degrees of centralization and “economy of scale”.

    while the New Deal promoted a Big Government/Big Bank highly successful model for capitalism.

    It was successful to the extent it matched what was happening in the economy.

    The current crisis just as convincingly represents a failure of the Big Government/Crony Capitalist model that promotes deregulation, reduced oversight, privatization, and consolidation of market power.

    “Anti-trust” was the missing ingredient. Technology at the present time favors distribution and descaling. The Age of the Mainframe is long over.

  9. b.

    “we do not want the Government to make credit decisions, they are too likely to dole out money to politically connected constituencies, while starving worthwhile, but unconnected borrowers.”

    Yeah, banks would never do that.

    What really blows my mind is this uniquely American concept called “libertarian” which does not get that corporations are governments without less accountability, few elections and a constitution that recognizes only profit. I have difficulties finding the “liberty” in thid – freedom from reason? Common sense?

    1. DownSouth

      “Angelo’s got him a hard road to travel,” Mrs. Reilly said absently. She was thinking of the PEACE TO MEN OF GOOD WILL sign that Ignatius had tacked to the front of their house after he had come home from work… “What you think about somebody wants peace, Claude?” “That sounds like a communiss to me.”
      –John Kennedy Toole,
      A Confederacy of Dunces

  10. Kay4

    Would any other president really be able to do better than Obama at a time like this. It seems like anybody in a leadership position right now is going to get a bad rep because the economy has just been hit too hard and has affected too many people.

    1. curlydan

      Yes. A President might appoint economic advisors who saw the problems coming, instead of appointing those who helped create the problem. A President might say the decision to repeal Glass-Stegall was a mistake and reverse course. A President might spend more time and political capital improving the economy instead of spending all political capital essentially extending the inefficiencies of the current health care system. A President might take any Too Big Too Fail banks and make it into multiple actually could fail and not break the system banks. None of that of course is happening but easily could have (remember our good friend, Rahm Emanuel’s quote, “don’t let a good crisis go to waste”) and that’s why we’re steamed.

    2. curlydan

      Yes. A President might appoint economic advisors who saw the problems coming, instead of appointing those who helped create the problem. A President might say the decision to repeal Glass-Stegall was a mistake and reverse course. A President might spend more time and political capital improving the economy instead of spending all political capital essentially extending the inefficiencies of the current health care system. A President might take any Too Big Too Fail banks and make it into multiple actually could fail and not break the system banks. None of that of course is happening but easily could have (remember our good friend, Rahm Emanuel’s quote, “don’t let a good crisis go to waste”) and that’s why we’re steamed.

  11. Doc Holiday

    My apology there in attributing the humor and post to Yves; I did read the title, but then defaulted to the very end of the post, which said: This Post Posted by Yves Smith at 11:16 pm

    Nonetheless, that lack of focus on my part is unacceptable and I’d like to thank Marshall Auerback for making my night and flinging double-edged fece, which hit both Obama and his pal Bush ….. Bawhahahaaaa ROTFLMFAO

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