A series of recent meetings with members of Barack Obama's economic team (including running into Larry Summers on my way to an appointment in the West Wing, leading to a spirited back-and-forth that made me feel like I was back at Cambridge, debating the smartest kid in the class), left me with a pair of indelible impressions:
1) These are all good people, many of them brilliant, working incredibly hard with the best of intentions to solve the country's financial crisis.
2) They are operating on the basis of an outdated cosmology that places banks at the center of the economic universe.
Talking about our financial crisis with them is like beaming back to the 2nd century and discussing astronomy with Ptolemy. Just as Ptolemy was convinced we live in a geocentric universe -- and made the math work to "prove" his flawed theories -- Obama's senior economic team is convinced we live in a bank-centric universe, and keeps offering its versions of "epicycles" and "eccentric circles" to rationalize their approach to the bailout. And because, like Ptolemy, they are really smart, they are really good at rationalizing.
It's easy to get lost debating the complexity of each new iteration of each new bailout, but the devil here is not in the details -- but in the obsolete cosmology.
If you believe the universe is revolving around the earth -- when, in fact, it isn't -- all the good intentions in the world, and all the endless nights spent coming up with plans like Tim Geithner's Public-Private Investment Program will be for naught.
The successive bailout plans have been frustrating to many observers (yours truly included), but when you realize how fully the economic team is mired in a bank-centric universe, all the moves suddenly make perfect sense.
Here is one example. Everybody agrees on the paramount importance of freeing up credit for individuals and businesses. In a bank-centric universe, the solution was a bailout plan giving hundreds of billions to banks. It failed because, instead of using the money to make loans, the banks "are keeping it in the bank because their balance sheets had gotten so bad," as the president himself acknowledged on Jay Leno. As a result, the administration, again according to the president, had to "set up a securitized market for student loans and auto loans outside of the banking system" in order to "get credit flowing again."
But think of all the time we wasted while the first scheme predictably failed. And how much better off we'd now be if we had provided credit directly through credit unions or small healthy community banks or, as happened during the Depression, through a new entity like the Reconstruction Finance Corporation.
Luckily, there is a plethora of economic Galileos out there who recognize that the old bank-centric cosmology is just plain wrong. But while Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc. are not being imprisoned for life for their heretical views -- they are also not being listened to. Which is really surprising for an administration that has prided itself on a "team of rivals" approach.
Worse, as the fundamental flaw in the administration's cosmology becomes more and more evident, the economic team around the president is closing ranks. Even David Axelrod, once the administration's champion of a more skeptical view of a bank-centric universe, appears to be peering through the Geithner-Summers telescope.
Back in February, he crossed swords with Geithner, arguing for executive pay caps. But there he was on Sunday, whiffing on a pro-populist softball offered up by Fox News' Chris Wallace, who asked: "When taxpayers are putting up most of the money and taking more of the risk, why would the Obama administration allow some of these executives to get even richer?"
Axelrod's answer? "On some of these programs, we're asking financial companies to come in and help solve this problem by providing more lending, by buying up toxic assets and so on. We don't want to create disincentives and undermine the program."
"Asking" them? Aren't we, in fact, bribing them with massive capital infusions and loan guarantees? That's what being surrounded by a group of modern day Ptolemys will do to a person.
Of course, it's less of a surprise that Geithner and Summers believe in bank-centrism -- they're both creatures of it. Which is why it wasn't a shock when it was reported this weekend that Summers had received $5.2 million for advising a hedge fund last year, or that he received hundreds of thousands of dollars in speaking fees from some of the very banks -- including J.P. Morgan, Citigroup, and Goldman Sachs -- that have been on the receiving end of billions in taxpayers money. Billions that have come with very few strings attached -- and almost no transparency.
I am in no way suggesting there is anything corrupt about this or any quid pro quo involved. It's just that in a bank-centric universe, funneling no-strings-attached money to too-big-to-fail banks is the logical thing to do.
So is arguing that the banking crisis is just a liquidity problem rather than an insolvency one, as Geithner continues to do (and if the stress tests come back declaring Citi solvent, it will be high time to start stress testing the stress testers).
In a bank-centric universe, it's also no surprise that "mark-to-market" accounting rules, in which banks have to calculate and report their assets based on what those assets are actually worth, instead of what they'd like them to be worth, are being abandoned. A good name for the reworked accounting standards would be mark-to-fantasy, because that's basically what balance sheets will be under these new rules. Of course, to a true believer in bank-centrism, the problem with mark-to-market is that it's not good for the banks. It's the accounting equivalent of Galileo's telescope.
Last week at the G-20 meeting, Gordon Brown proclaimed that "the old Washington consensus is over." But when it comes to attacking the financial crisis, the zombie Wall Street/Washington consensus that has everything in America orbiting around the banks is still the order of the day.
The longer bank-centrism is the dominant cosmology in the Obama administration -- and the longer it takes to switch to a plan that reflects a cosmology in which the American people are the center of the universe and are deemed too-big-to-fail -- the greater the risk that the economic crisis will be more prolonged than necessary. And the greater the suffering the crisis will continue to cause.
There is an enormous human cost to this bank-centric dogma. Unemployment, already at levels not seen since 1983, is skyrocketing. In many places in the country, it's approaching 20 percent (and in Detroit it's 22 percent).
Writing about the "grand book" that is the universe, Galileo declared that it "cannot be understood unless one first learns to comprehend the language and interpret the characters in which it is written... without these, one is wandering about in a dark labyrinth."
That's where we find ourselves today, wandering about in a dark financial labyrinth -- being led by good men blinded by an obsolete view of the world.
President Obama needs to open his inner economic circle to those untethered to this flawed way of thinking and acknowledge that navigating our economic crisis using maps based on a cosmology that places banks at the center of the universe can only lead to our being lost at sea for years to come.
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(it's a little too long to post regularly, sorry)
flashrob
their course at all. Nobody seems ready to get out the pitchforks so what can we do???
..another FINANCIAL fantasy shuffle appears to be taking place EVEN BIGGER THAN THE "REAL ESTATE" chain-letter (that ran out and precipitated all this mess)...
SHOW ME HOW THEY ARE MAKING PROFITS based on growth, NOT JUST ACCOUNTING RULE CHANGES, OR BORROWING CHEAP FROM THE GOV and loaning to a FEW who yet have credit and might need funds (small biz staying alive mostly trying to weather the storm for better consumer days....) OR BUYING EACH OTHERS STOCK/ASSETS to:
PUMP UP THE FINANCIALS IN THE STOCK MKT!
It don't compute: Declining GROWTH, Declining CREDIT for most, where ARE REAL PROFITS FOR FINANCIALS COMING FROM...
other than TRICKY ACCOUNTING, SHUFFLING OF ASSETS, BUYING EACH OTHERS STOCKS....
FLASHROB
...how 'bout a LITTLE TRANSPARENCY - like we were promised by just about everyone - on BANKS PROFIT NUMBERS...
Like how, IN A CONTINUALLY DECLINING ECONOMY they are managing to be profitable - something STINKS here....
like: their assets continue to decline (ok, so assets are revalued upward because of modification of "mark-to-mkt" ...and that's tricky because if mostly applies to DERIVATIVES of the investment banks....)
so, they get a little help in shoring up asset vals....
BUT IN A "WORLD CONTRACTING ECONOMY" ...WHO ARE THEY MAKING PROFITABLE LOANS TOO...who's needs capital to EXPAND when just about everyone is DOWNSIZING...how much money do you need to downsize?
so, let's have TRANSPARENCY on the BANKS NUMBERS and analyst eval on how they plan to keep making loans (like who needs loans, except the "consumer" who NOW DOESN'T QUALIFY FOR a credit/loan...with either his job loss...or I heard the CreditCard companies are already DOWNGRADING CREDIT of people who they feel are AT RISK OF LOSING THEIR JOB, etc.
...and as long as we are still topping 500k job losses a month...with corresponding LOSS OF CREDIT...and probably default by those people on their mortgages....where are these BANKS MAKING PROFITS...
I WANT TO SEE THE NUMBERS "AND HOW THEY ARE GENERATED," THEIR PLAN GOING FORWARD FOR REVS, ETC....
BANKS AND OBAMA... STOP MEDIA SPINNING "GOOD NUMBERS" WITHOUT "SHOWING ME HOW YOU ARRIVED AT THEM!
continued in part 2 of 2
flashrob
.
The cycle of Greed, collusion, irresponsibility,deceit could not be more evident--since the last administration. Have you noticed that Obama is now speaking about helping people who's mortgages are up to date. Ironically the home modification programs tells people to put the mortgage on hold until the bank comes up with a deal. Few deals are coming forth while this whole issue only adds to the increase in the gap between rich and poor and a false sense of security for an already abused constituency of Americans.
Why wouldn't everyone just want to hold onto their cash and who can blame them?
WHY NOT????!! ISN'T IT OBVIOUS????
Otherwise great post, Arianna. Well thought out, clear and very well written.
Personally, I think the real plan is to eventually nationalize our banking system (the way it should have been long before) BUT - Obama couldnt just come straight out and say or do that. Our society is so protective of American ideals that "the change" needs to be spoon fed to us. Nationalizing of our banks have already begun - he just can't say it yet. It IS the only solution.
There's a lot of money to be saved by everyone when banking fees are lowered by way of nationalizing banks.
The fox is guarding the henhouse now.
we have been lied to and robbed for so long by so many that we cannot see the truth.
If this is such a national emergency, why are we so afraid that the banking executives will walk away from their jobs without millions in bonuses? What kind of Americans are they? Un-American banking, insurance and finance executives extorting the American people for millions or true Americans ready to answer the call when their country needs them most?
The banking executives have proven themselves to be the prior. Parasites if you will and I, for one, don't need them. The average Military General. SEC and FBI Department Chiefs, and so forth seem to get by just fine on less than 200k per year protecting our country. Even in times of no emergency.
W.J. Wait
Hey, Dems, your girl said it, not me...
Hey, Reps, your girl said it, not me...