In a prior post, I looked at the foreign policy record of Obama's first year in office. This post continues with a look at his domestic record.
If one just looked at numbers, Obama's first year would have to be rated a huge success. According to Congressional Quarterly, Congress passed over 96% of the bills on which the new President took a stand. This is an all-time record: Reagan's 8-year average was just over 80%. Even the prior record holder, the wily LBJ, got a mere 93% of his bills passed. Conservative blogs took note during the year, pointing out that the Obama administration quietly, but effectively, reversed many policies put in place in the last 40 years of mostly Republican governing.
But the large number of small accomplishments did not shape public perception. That was largely formed in the crucible of four big things: the bank bailout (TARP), the stimulus bill (ARRA), the auto industry restructuring, and the health care debate.
For better or worse, Obama put his prints on the TARP weapon while still a candidate. If the election was ever in doubt, that vanished in a fateful week in October, 2008. Sen. John McCain (R-Ariz.) postured about suspending his campaign, dithered on the TARP bill, and stood up the David Letterman show. Obama took stands to make the TARP process a bit more accountable and the bill more palatable.
In office, Obama immediately disappointed the left by picking an all-insider financial team led by Larry Summers and Tim Geithner. Those hoping for a new New Deal of tough regulation were left in the cold. If there was an opportunity to use the crest of public fear of economic collapse and anger at the irresponsibility of Wall Street to quickly enact big reforms, the Obama team wasted it.
Instead, the team did something as breath-taking and risky as the bankers who created the crisis. They used extreme leverage to push the opaque markets for complex derivative securities up, just as leverage had clobbered the same markets a few months earlier. Few, if any, economics blogs appreciated the nature of this stunning bet. If it had gone wrong, the literally trillions of dollars pledged by the Fed and Treasury would have evaporated. October 2008 would have been a Sunday picnic compared to what could have been.
The alternative had its own horrors. That would be to put the banks through a bankruptcy-like reorganization: divide the "good" assets, like deposits and mortgages, from the "bad" assets, like credit derivative swaps. The bad assets would be cornered off, to be resolved over time. Most would likely be totally written off. The good assets would be written down to market value. Banks would need massive new capital injections. There would be a lot of pain, but reform could be done faster.
Geithner's bet worked, at least so far. Economists across the political spectrum agree that we are away from the brink. The stock market is back over 10,000. But the damage from the meltdown on Bush's watch remains.
So does the risk: it was only pushed down the road, not eliminated. Predicting another financial crisis is like predicting an earthquake in California or a hurricane in Florida. One cannot say exactly when or where it will hit, or how long we have until the next "big one." But the unchanged conditions of excessive leverage and insufficient regulation make it a mathematical certainty that it will happen.
Time will tell if Obama, Summers, and Geithner were right to get the financial system away from the brink before trying reform or if they wasted the crisis. The political environment for banking reform appears more difficult looking into the second year. Anger once relatively narrowly focused on the banks now spills across a broad front of issues, giving steam to the Tea Party movement.
The banks still stubbornly resist marking their questionable assets to market. It will take not a few thousand but a million or more under water mortgagees walking away to compel change. In the 1990s the Japanese banks avoided writing down their bad loans for almost a decade. Japan has yet to recover its economic vitality: an object lesson that should not be allowed to get lost in the political howling.
My report card on the TARP goes as follows. Obama's team gets an A for avoiding catastrophe -- and survival is the highest imperative at all times. Another A for sheer guts: we went "all in" with literally all the marbles in the world. On solving the larger problem with the banks, the only possible grade is Incomplete. As for explaining the problem to the public, an absolute performance grade would be at best a D minus; but since the performance of both parties and all the news media was so abysmal, a grade on the curve could be a B plus.
Stay tuned for future posts on the Stimulus Bill, the auto industry, health care, and Obama's first year as leader of his party.