Why is the new President behaving like the hostage-in-chief in dealing with the people who’ve brought our country to the brink of economic ruin?
Updated April 21st. The LA Times reports federal investigators have opened twenty criminal investigations into the $750 billion bailout program and quotes special inspector general Neil Barofsky as saying the complex nature of the scheme makes it “inherently vulnerable to fraud, waste and abuse.” -tc
Having grown up in Panama, from where the legendary Spanish treasure flota gathered its gold and silver and pearls to send home to the king, I learned at an early age the stories of Henry Morgan and the other real pirates of the Caribbean. And I still love a good pirate story. Huddled with my family by a wood stove in the
San Juans over spring break I enjoyed a recent biography of Francis Drake. Drake, among many other grand exploits in plunder, led expeditions through a stretch of Panamanian rain forest within walking distance of my grandfather’s old house in Gamboa. And, of course, a new pirate story has been unfolding a world away this past week as Somali pirates boarded the Maersk Alabama and took its captain, Richard Phillips, hostage.
Unfortunately, Morgan, Drake, Blackbeard, and the contemporary Somalis are like youthful shoplifters compared to the nearly unimaginable plunder that has been committed in the past decade by American financiers.
The problem, as the distinguished author and social critic Kevin Phillips points out, is that the methods of the modern thefts are complicated. The complexity of the fraud leaves us without the cinematic images that we need, as a society, to understand the story and to direct our energy and emotions in the right direction. Maybe it would have helped if the central characters at AIG and the banks would have worn eye patches, and bandanas and traveled with wise-cracking parrots on their shoulders.
But, sadly, we weren’t that lucky.
The facts about what happened are surprisingly not in dispute. I mention Phillips for two reasons. First, his scholarship favors neither party and his foot-noted criticism of the economic policies of George W. Bush over the past eight years has been withering. His message has been that wealth and power have been consolidated, as never before, to promote the interests of the wealthiest Americans at the expense of the rest of society. His main message now is that the current financial crisis “is a much grander-scale disaster than anything that happened in 1929-33.”
The second reason I mention Phillips is that he has begun to articulate what to me, as a dyed in the wool journalist, is the most cynical and disturbing aspect of how first Bush, and now Obama, have responded to the financial crisis. It’s a decision to form what amounts to a public/private partnership with the captains of a corrupt financial system to save it from sinking, And it’s coupled with a calculated wager that the American people are too poorly informed and/or too simple-minded to react to the scheme with understandable rage.
“The average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved,” Phillips writes. “Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.”
Part of what we need to work through here, as citizens, is the flak fire of purely partisan criticism aimed at Obama’s spending plans. In short, we can’t be confusing the Kevin Phillipses of the world with the Rush Limbaughs, Glenn Becks or Sean Hannitys and putting fingers to ears. Indeed, the most astute and important criticism of Obama’s financial system recovery plan is coming from people who supported his Presidency.
On this front, the interview you have to watch, if you haven’t seen it already, is the one that Bill Moyers did a week ago Friday with William K. Black. Black teaches Economics and Law at the University of Missouri, Kansas City and is the former Director of the Institute for Fraud Prevention. You can watch the interview here and I’m attaching the transcript, courtesy of Bill Moyers Journal, here.
What Black makes a compelling argument for is that the ongoing financial collapse is rooted in endemic fraud. What he explained to Moyers is what’s at the heart, I think, of Kevin Phillips’s frustration. It’s no mistake that one of Black’s books is entitled “The Best Way to Rob a Bank Is to Own One.” What he’s getting at is the quiet, clever, but not so hidden banditry that has been occurring in transactions that are legal, but fraudulent, and unregulated and unpoliced because of financial industry influence to avoid regulation and enforcement. Again, it just would have been easier on all of us if the buccaneers flew the Jolly Roger rather than hiding behind briefcases and corporate logos. But they didn’t and the reason Black chuckles so much in his interview with Moyers is that we really do know the facts now about what happened and the sadly appalling corruption of our government that enabled it.
When brave people stepped forward with warnings, they were told that it was just better to trust a system whose vices would be self-regulating. A story for the ages is the now famous conflict between Brooksley E. Born, the former chairwoman of the Commodities Futures Trading Commission (CFTC), and the once Zeus-like Alan Greenspan, the former Federal Reserve Chairman. Thirteen years ago, Born was urging Greenspan and others about the need to protect the financial system from unregulated derivatives, like the credit default swaps that AIG would use to basically set off a truck bomb in the basement of the world’s financial system.
Greenspan didn’t listen to Born. And neither did Congress which took the rather unusual step of actually passing legislation to prevent Born from more actively intervening to regulate the markets. Stymied, she left government to return to private law career. You can read Ms. Born’s story here.
Or you can ask current U.S. Senator Byron Dorgan. Dorgan is billed in the current Newsweek as “The Senator Who Saw this Coming.” Dorgan, like Born, was an early outspoken critique of “exotic new derivatives” but most of his colleagues in Congress, including Democrats, rolled over for deregulation of the financial markets. Precisely ten years ago, Dorgan told the New York Times: “I think we will look back in ten years time and see we should not have done this.”
What clearly gives Dorgan and others heartburn now is that the advisors guiding Obama now are the same ones who ignored his and Born’s warnings a decade ago. Although reforms are promised by Lawrence Summers and Treasury Secretary Tim Geithner, the heart of the Obama plan is one that uses taxpayers as a giant and cushy safety net for inducing investment funds to buy up so-called “toxic” assets from troubled banks.
There’s a swamp of cognitive dissonance here and precious little transparency, thus far. It doesn’t serve the purposes of this new partnership to squarely examine, acknowledge, and bring deserved measures of remonstration and sanctions to those who got us into this mess via their greed, because (in some Dr. Seuss-like riddle) we now need their greed to get us out of this.
“It’s conceivable this plan could work for the funds,” writes the New Yorker’s Nicholas Lemann, “but fail to save the banks, which will still have lots more bad assets on their books. As long as it works for the funds, some very, very rich people are going to get much richer, thanks to once-in-a-lifetime favorable terms provided by the federal government [read, taxpayers] and unavailable to the rest of us. What then? It will be a few years before this has played out. Maybe by that time the economy will be better, and the country will have calmed down. If not, the dynamic we have seen in the past few weeks will only become more severe, and who knows what kinds of social poison will work their way into the fabric of American life.”
Of course, what Phillips, Black and others have beens saying is that the I.V. drip for the social poison was hooked up to our arms years ago and that we’re still not doing anything fundamentally different in order to unplug it. Black’s interview with Moyers should be absorbed right along with Simon Johnson’s new piece in The Atlantic, “The Quiet Coup.”
Johnson teaches Economics at MIT and is just coming off a two year term as Chief Economist for the International Monetary Fund. His cogent article makes the compelling case that the predicament the U.S. finds itself in, now, is identical (though on a larger scale) to the crisis predicaments that nations with emerging economies have come to the IMF to help solve. The one lesson the IMF has learned, Johnson writes, is that debtor nations with these kinds of dire problems can’t be put on a path to solvency unless the oligarchies whose abuses caused the problems are broken.
But that’s not what’s going on with Bush’s and now Obama’s plan, Johnson writes. In his article he describes the American financial oligarchy, recounts (as Phillips has) its astonishing record in bending Washington politicians of both parties to its will, and concludes that Obama’s approach is not going to work.
“Even leaving aside fairness to taxpayers,” he writes. “The government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.”
This is not a spectator sport. There’s a direct connection between the well-documented abuses of American financiers and the plague of rising unemployment and severe budget cuts facing states and cities from coast-to-coast. No doubt it’s true that Main Street has to take some responsibility for the rampant foolishness in how we’ve used credit in general and home mortgages in particular. But the ethical depravity of the American oligarchy that Johnson describes is what turned an economic fender bender into a 16-lane pile up. It remains an astonishing sight that will, for generations, affect how we look not just at economic justice in America, but how we look at democracy itself.
I’m quite sure that among Obama supporters many are putting aside whatever misgivings they have about his plan in the belief that Obama, Lawrence Summers, Tim Geithner, and the rest of the President’s team are clever people who know more than the rest of us about the depth of this crisis and how to fix it. I’m not in that camp. To me it seems we’re continuing to use the haste of a crisis to suspend the rules to favor those who got us into the mess to begin with. Thus, to me it appears Obama has let them take him and us hostage to their aim of remaining in control of our economy and the insulated machinery of their wealth.
I think the President may well have made a tragic mistake. I think Obama has a sense that if he can muddle through with a complicated scheme to save the banks, without necessarily confronting and reforming the American oligarchy that Johnson describes, then he can get on to the things he really wants to do, like health care, green energy development, education, etc.
I hope, for his sake and ours, that he’s wiser than that; that he realizes that on something as profoundly consequential as this, there is no substitute to exposing what went wrong, acknowledging the depth of the problem, and framing a solution that fits.
–Tim Connor
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