Summer Rerun: Geithner and Summers as Obama’s Cheney and Rumsfeld

Readers new to this site may be unfamiliar with Yves’ summer rerun series, in which she reprises vintage NC posts that have stood the test of time. I would like to add a post of mine from Credit Writedowns to the lot. The recent New York Times piece from Joe Nocera on Sheila Bair is a must-read piece about the goings-on in policy circles during 2008 and 2009. For me, the article confirmed the view of the Obama Administration and its craven support for bailing out too-big-to-fail institutions that I put forward in the post below. Tell me what you think.

This post first appeared on 6 November 2009 on Credit Writedowns as “The less optimistic view of Treasury’s handling of the crisis.

The Obama Administration is captured. To understand why it has acted as it has, one doesn’t have to take the view that its efforts to save the banking industry were a deliberate attempt to line bankers’ pockets by transferring money from taxpayers to the banking industry. One need merely read the last post I wrote on this topic.

In their wildly optimistic view, the banking industry is solvent and always has been. All that was needed to ‘solve’ than banking crisis was a lot of liquidity, government backstops and, most importantly, time. This blinkered view sees a looting of taxpayer money to bailout the banking industry as necessary to save banks whose credit is the ‘lifeblood of our economy.’

They are wrong. The banks did not need to bailed out. The banking industry industry needed to made solvent again. There is a big difference between those two sentences (banks versus banking industry and liquidity versus solvency) that goes to the core of the captured and politically damaging world view we have seen on display by the Obama Administration.

Change you can believe in

Think back some 18 months when Senator Obama was in a horse race with Hillary Clinton to see who would go up against John McCain in the Presidential election. If you asked any reasonable individual who had the least experience and the thinnest political resume of the three, he or she would have said Barack Obama. If Americans wanted someone long on inside-the-beltway experience, they would have chosen John McCain – or, at a minimum, Hillary Clinton, not Barack Obama.

So, Barack Obama did not best both Hillary Clinton and John McCain and get to the White House because Americans felt him more qualified for the job. Rather, Americans believed the U.S. was on the wrong path and wanted a qualified person to lead the country who would also change course. They believed that person was Barack Obama.

And when it came to the economy, the presence of two men, Paul Volcker and Warren Buffett, born some 80 years ago, gave one the sense that, despite Barack Obama’s perceived relative youth or inexperience, he had the ablest of wise old men who would be his and our counsel in resolving this crisis.

Bailing out the banks

So when Barack Obama took office, it came as a rude awakening for many that he chose to bail out the too big to fail institutions with little or no strings attached, allowing them to later make record profits and pay record bonuses, while the economy was in a deep slump and ordinary Americans were being bankrupted and losing their jobs and homes at record rates. This was not change you can believe in.

What could or should the Obama Administration have done?

If you had listened to the chatter inside the beltway early this year, you would realize that Obama’s team believed it was not politically feasible to ‘nationalize’ Citigroup or Bank of America and force top executives to resign as was done at RBS, Bradford and Bingley or Northern Rock in the UK. This was a blinkered view which can only be described as captured (if not outright disingenuous). We need look no further than Fannie Mae and Freddie Mac to see that nationalization was an option.

But this is not the kind of solution we needed. What we needed was a solution by the Administration to take prompt corrective action in seizing bankrupt institutions, dismissing management, punishing any misdeeds and setting up a timetable to sell off the institution’s assets. That is change you can believe in.

I laid this out fairly comprehensively in February in my post “America needs a pre-privatization plan.” So I am not going to cover that ground here except to quote the key relevant passage in that post:

To my mind, there are three ways to deal with an insolvent financial institution:

  • Bankruptcy. Allow the institution to collapse (like Lehman Brothers)
  • Nationalization. Seize the assets of that institution and nationalize it (like Northern Rock, AIG, or Fannie Mae)
  • Bailout. Inject capital into the institution in order to allow it breathing room until it can meet capital adequacy levels.

As you can see, governments have tried all three solutions. However, there are vast differences between the three.

The bailout solution is the most ‘anti-free market’ choice and seems to be the favored solution of governments everywhere. It props up organizations, giving them an unfair advantage at the expense of other more prudent institutions. It also acts as a subsidy, which favors domestic institutions over foreign rivals. Bailouts increase moral hazard by rewarding risky and reckless lending practices. And they are often the result of crony capitalism due to the power of the financial services lobby. There are many other problems with bailouts. All around, bailouts are a poor solution.

So what we have here is a case of crony capitalism and kleptocracy, plain and simple – whether by design or not is immaterial. And the American people are on to this. That is why people are resistant to other changes this Administration has put forth.

Don’t let the media’s spin fool you: Washington insiders are on to this too. Politicians in Congress realize that Obama’s bailouts have cost him political capital and they are challenging his policy agenda as a result. This is why the health care bill, which Obama wanted passed before the summer recess, may not see the light of day before year’s end.

Are we home safe?

I would advise the Obama Administration not to run any victory laps about having slayed the beast. The lingering effects of crisis are still there. The Fed’s liquidity is still liquid. Impaired assets are still impaired. And zombie banks are still zombies. As I indicated in my depression piece:

In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized.

Since I covered this ground in that article, I will leave you to read my further thoughts there. What I want to turn to now is the ‘why.’

The Cheney-Rumsfeld replay

Now, I am not writing off Barack Obama’s presidency. I do worry he still could see a recessionary relapse which would cause him to seem more Herbert Hoover than Franklin Roosevelt. But, despite his Nobel Prize, it is much to early to know what his legacy will be.

Nonetheless, I believe he has wasted a lot of political capital and this will make ushering through a meaningful legislative agenda very difficult.

Why did Obama throw it all away?

Here’s my answer: I call it the Cheney-Rumsfeld replay.

When historians look back at the Bush 42 presidency, it will be defined by 9/11 and the wars in Iraq and Afghanistan. While George W. Bush was politically pre-disposed to the Neo-con world view, it was really advice from Dick Cheney and Don Rumsfeld which made Afghanistan and Iraq possible. George W. Bush was famously not well-versed in foreign affairs, having almost never travelled abroad. He was completely dependent on Dick Cheney and Donald Rumsfeld to make foreign policy (although he could have listened more to Colin Powell, his actual Secretary of State; again it goes to predisposition).

So, I see George W. Bush’s presidency as having been defined by foreign policy and the War on Terror and, by extension, on Rumsfeld and Cheney.

Fast-forward to Barack Obama’s presidency and you have an almost identical situation, this time with the economy instead of foreign policy and Tim Geithner and Larry Summers instead of Donald Rumsfeld and Dick Cheney.

But, as with George W. Bush, it goes to pre-disposition. Paul Volcker was a critical member of the Obama 2008 campaign. He also was a key member of Obama’s economic policy team. But, he has been speaking a very discordant message that is not in sync with team Obama. So, as with Bush and his marginalization of Powell, one has to believe Barack Obama has chosen to side with Geithner and Summers over Volcker. Why anyone would do so given Volcker’s experience is beyond my comprehension.

The obvious conclusion, therefore, is that Barack Obama shares the blinkered and captured view of his policy makers and that this is why he has decided to go down this chosen path. And when it comes to Obama’s other ‘change’ decisions on the Guantanamo closure, torture, rendition, state secrets, and health care, the same logic also applies.

Is this change we can believe in? I will leave that for you to decide.

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This entry was posted in Banana republic, Banking industry, Corporate governance, Guest Post, Moral hazard, Politics, Regulations and regulators, Summer rerun on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Smoke n' Dimon Mirrors

    Rude awakening for whom exactly? (The deluded, institutionalized, indoctrinated, and/or drunk?)

    “So when Barack Obama took office, it came as a rude awakening for many that he chose to bail out the too big to fail institutions with little or no strings attached”

    They funded his selection. It was obvious during his time as a junior corporate hack featuring tort reform, then the posturing stupidity show with Hillary Random Klanton, culminating in his AIPAC presentation.


  2. XRayD

    Bush0bama gang.

    Much of the sorry history of the “financial crisis” is now well known. The theft, fraud, the waste and misallocation of capital in order for the players to get their “cut” of the trillions of dollars of ‘fake money’ created by “financial innovation”, which lies at the heart of our moribund economy, is staggering.

    We all know that the markets are a reflection of the economy, and ultimately the markets are about CONFIDENCE. The economy has stopped working because of this lack of confidence. The stock and commodity markets are merely a fig-leaf of Mr. Bernanke’s imaginary “wealth effect.” The bond markets is sailing on money created out of thin air.

    The average American simply appears to have thrown up his arms in despair and helplessness because he/she knows that Wall Street and Washington care nothing about them beyond using them as pawns in the endless and fruitless “talking point” debates and dueling op-eds in the media.

    The “housing” part of the financial crisis has mostly been ignored.

    With massive mis-allocation of capital into credit instruments of all types, and resulting attendant demand on future cash flows for interest and principle payments, is it any surprise that no oxygen is left for the real economy?

    I agree that drastic intervention was called for to deal with the so-called “financial crisis” (as if was caused by the weather) by taking over failed big banks and cleaning them up in a fair open and honest way, including punishing those responsible by making them disgorge their ill-gotten gains.

    Instead, the people responsible have been rewarded, and too big to fail institutions are even bigger. And all the “risk” is now deliberately piled onto the aching backs of tax payers of the future and reducing their standards of living.

    To add insult to injury, those who have captured Washington now call the lack of confidence “Uncertainty” and keep braying about “too much regulation.” And demanding more “tax cuts” to boot with fake promises of investing and creating jobs.

    Obama should quit complaining about the economy he “inherited” not being as strong as he would like. By failing to take firm action on behalf of the American people, and instead jumping into Wall Street’s bed, he is clearly responsible for making things worse and digging us into an even deeper hole.

  3. Sauron

    Obama must be “captured” (for whatever reason). Ignorance of economics, like the law, is no excuse, because the fundamentals of building a prosperous economy are not that hard to understand. Maximize your human capital. Favour policies that maximize employment and encourage training and education. Maximize your country’s natural capital–build the best infrastructure/find the best energy solution you can. Then use these two ‘legs’ productively–i.e. not digging holes/filling them in, bombs, or societal luxuries like a supra-rich class.

    THEN you bring in the experts to help acheive these goals.

  4. Richard


    The post was a terrific post the first time you published it too!

    As for the effort to canonize Sheila Bair, it will be shortly undone by the facts surrounding her leading the FDIC. As a practical matter, Sheila also believed in the government guaranteeing everything.

    Look no further than the structured finance deals that she oversaw. Faced with a choice between providing asset-level disclosure or a government guarantee to make the deals sellable, she opted for the government guarantee.

    On to Obama. The fact that his administration did not address the solvency issue is now hitting home. When everyone in Washington can see that you have failed, you have zero political capital.

    Unfortunately, he is terrified of the prospect of default (he appears to have run his entire economic platform on fear based decisions – example, bailing out the banks) . As a result, he is willing to end Social Security and Medicare (I know, he is only making a modest adjustment, but that is today and the Republicans still have not said they agree, hence, much, much more to come).

    If I was the Republicans, I would make sure that both programs are dismantled and that there is agreement to undo Obamacare too so that they can have their tax cut for the rich.

    While I think this is terrible for the US, I think Obama is so terrified of default that he will agree to anything (when has he actually stood up for anything/drawn a line in the sand). Thereby cementing his place at the top of the worst presidents in the US and even worse, not addressing the solvency issue that will continue to plague this country.


  5. Martin

    Obama lost me before the inauguration. When he named his economic team I knew where this was going – disaster. Obama is an empty suit that was styled at the Friedman school of economics. The fact that he will not even consider a jobs program tells you he is OK with the pain the 99 percent of the public is suffering. Like Bush he uses faith based economics.

  6. kares


    It is good to see one’s reflections committed to paper for later recall, and see one’s insights and analyses proven right yet again, this time by history.

    Obama just like Bush II has neither training nor aptitude in economics and economic history, is managerially inexperienced, philosophically and intellectually immature, and not anchored to any notion of social justice, despite having been a “community organizer”. The community organizer position was a stepping stone, for an ambitious (black)man in a hurry: a convenient resume builder for some one wanting to be accepted at Harvard.

    Since, Bush’s term was up he had to be replaced by a similar, a twin, as it were, just like replacing an expiring bond by another equally lucrative bond. The investment banks vetted Obama undercover via Geithner, the head of the NY Fed. Obama knows which way his bread is buttered. No wonder, despite serious and visible moral lapses — having not paid his taxes– Obama told Geithner that he was secure as his Treasury Secretary, that he would fight tooth and nail for his nomination, some thing he did not do for equally morally compromised Daschle. Obama, had to have his channels open to the investment banking and Wall Street community for the 2012 bid, and now that he has Daley as his conduit to Wall Street as his chief of staff, Geithner can make the sounds about leaving.

    So, we have history (1937) repeat itself, just like under Franklin Roosevelt, an unending recession, because of wrong policies of deficit reduction that Roosevelt adopted, despite Keynes” admonitions. Except now we have a jester as king, morally unequipped to fight an ideological war, because his aides tell him that he would return to being a jester, if he does not fight with the tools that they have pressed on him — tax cuts which proved useless in the last go-around in 2009 and secondly, “deficit-reduction.” They advise patience, good advice for the chronically unemployed.

    The jester will be retired in 2012 and we will go back to history which was left unfinished because of the IInd World War. As Hegel said history repeats itself, the second time as tragedy.

    1. Crocodile Chuck

      The jig was up in December ’08 when it was ‘announced’ that Geithner was slated for Treasury.

      Later, there was a revealing quote by Hank Paulson in a VF piece on the financial crisis. He said (in September, ’08) about Geithner, ‘He’s going to make a great Treasury Secretary one day’

      Baked in the cake……..

  7. Neildsmith

    Yes, the Obama administration and nearly everyone with a stock portfolio or even a decent 401(k) balance is captured. So are homeowners with mortgages. We are all captured. Can’t live with the evil bankers… and can’t seem to live without them. What to do?

    1. Cedric Regula

      They take advantage of that one too much. And there is a big shopping list of todos. It’s just that our leadership has decided it’s all dodo.

      1. Neildsmith

        The things on our to do list all involve sacrifice. That’s why they never get done.

        1. LifelongLib

          Average Americans have been sacrificing for the last 30 years at least. I am not better off than my parents. My son will never be as well off as I am. It’s time we started sacrificing the people responsible for that.

  8. acat

    He was a fraud and allowed all the old and tired libs to project all their hope and change onto him and a few corrupt neo-cons to buy him off.

    I screamed from the mountain tops that he had all the wrong advisers around him before the election.

    It was no surprise who he would appoint at least on the econ team.

    He was destined to be a failure and even though I would NEVER vote for a man of his shallowness the Mccain term would have been just as bad.

    There were no good choices and won’t be anytime soon.

    Obama felt he was the shield that kept the mob from the banksters throat, that was clear and he said as much.

    Hard to see how that ever meant reform with any teeth.

  9. Sayer

    I like to think I know human nature. I like to think I can’t be duped. And yet it seems that Obama has successfully duped me.

    During his campaign he seemed so sincere. His speeches rang with sincerity. His promises rang with sincerity. I like to think I can recognize sincerity.

    Sincerity can’t be faked (I think). So I am left to believe that everything Obama said at the time was sincere; that is, he himself believed what he was saying.

    For me to believe otherwise is to admit that I was duped by a pathological liar. And I just can’t believe that I am that naive.

    1. pj

      We were all duped.
      I leave you with two quotes;

      The true hypocrite is the one who ceases to perceive his deception, the one who lies with sincerity. ~André Gide

      A man generally has two reasons for doing a thing. One that sounds good, and a real one. ~J. Pierpoint Morgan

    2. chris448

      When Obama twisted Geraldine Ferraro’s words radically out of context and framed her as a racial “extremist” in his speech on race, wasn’t that a cause for doubt? When Obama passively agreed with repeated fake suggestions coming from his campaign and his followers (as clearly noted by Paul Krugman and others) that the Clintons were racist, wasn’t that a warning signal? When Obama made the bird on his cheek when he mentioned Hillary in a speech the day after the Philadelphia debate, was that a sign of sincerity? And so on. There were quite a few warning signs in 2008, so when people feel they were duped, I wonder what universe they were in back in 2008.

  10. pj

    I find it difficult to believe that those Alphas with the real power in government would simply abdicate that great power to others for mere money. I know some may think it’s a bit more nuanced than that, but in the end, it really isn’t.

    Only the government has the right – and the power – to regulate commerce. In other words, government can determine winners and losers as long as they uphold the laws (or change them to suit their purposes).

    Look up the words “regulate” and “commerce” and you will know that Obama and Congress are responsible for every single thing that is currently wrong with our economy.

    Can we impeach an entire administration if it is found they are criminally negligent?

    If so, maybe we should file a lawsuit.

  11. Don

    I am really impressed how well this article reads, in the light of recent history. Truly an excellent piece of analysis and insight!

  12. ep3

    Tho I agree with most of what you say, I disagree with this comparison of the two groups. When you compare something, you automatically create this thought that yes, there are similarities, but there are also differences. I don’t believe there were differences, other than superficial, between Bush and Obama. I believe they are run by the same wealthy elite powers that be. The only differences were in how the PR and message were delivered. One for illiterate idiots, the other for sweet talked idiots.

  13. peter de haan

    Good article. I just take exception to seeing Colin Powell as the ‘good guy’. I rather see him as the ‘good cop’ in a classic ‘good cop – bad cop’ routine. He, after all, really got the job done at the end with his UN speech presenting fake evidence, and he knew it too. (and mainstream media touting that if Colin Powell says so, it must be taken seriously – the final nail in the coffin of any attempt to prevent the Iraque war)

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