The Tricky 2009 Politics of Finance

Despite its recent uptick, the stock market has plummeted since Barack Obama's January inauguration. The Republicans seek to blame the man and his policies, with which most Americans take issue. Still, it's more common for the hope invariably surrounding new presidents to spark a rally.

That was certainly true in the depths of the Great Depression and the 1932 presidential election. Back then, new chief executives took the oath in March, and Franklin D. Roosevelt's first months in office sent the battered stock market indexes soaring. People could almost smell the hope in the Spring air,. By June 1933 the battered Dow Jones Industrial Average had climbed by some fifty percent.

Democratic strategists and activists should be concerned over the contrast. Although it's too early to reach conclusions, it is useful to take a hard look at what's going on in the ever-changing politics of finance.

Back in early 2008, I published a book entitled Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism. It did well, and now is about to come out in a much-expanded and updated new post-election edition on March 31. Politically, it holds Wall Street, the Federal Reserve and the Republicans principally responsible for what went wrong over 25 years of financial greed and complicit Washington regulatory negligence. In party terms, the GOP gets 70 percent of the blame and the Democrats 30 percent. When I finished the new additions in January, however, I was skeptical about whether Obama would be able to bring about the needed changes and reforms in U.S. finance. His team had become too entangled with with the financial sector and its massive political contributions. Besides, too many of his top appointees were recycled senior Democrats from the Clinton administration's own tech mania, deregulation binge and stock bubble and crash of 1997-2000.

Still, I had voted for Obama in November. Even at New Year's, I hoped that the indications of the new administration's continuity with the failed financial bailout policies of the Bush administration would dissipate by Spring. I assumed that by the time I had to book tour in April, some long-neglected indictments of the financial sector would be on the table, and that debate over the bailout and over the disastrous misjudgments of the Federal Reserve Board would remain open. I would not have to criticize Obama himself.

Now, with April only two weeks away, that may be too hopeful.

The Obama financial program -- the rest of his agenda, remember, will almost certainly depend on his retooling failed finance -- shows hints of a flawed combination. Its first weakness, in both policy and retention of prior government officials, involves an appearance of extending the mismanagement and pro-Wall Street bias of the 2008 Bush regime bailout. Its second Achilles heel, rather than representing the hopes and demands for change from the Democratic Party's grassroots and net roots, involves re-enlisting and banking on the big names of the Clinton administration's regulatory and bubble-managing failures of the late 1990s, especially former treasury secretary Larry Summers and many proteges of former treasury secretary Bob Rubin.

This where the Democrats' 30 percent responsibility for the abuses of the last quarter century has its crippling 2009 relevance. The GOP's 70-percent blameworthiness, while centered in the 2001-2008 misrule of George W. Bush, also goes back to the George H.W. Bush years and the later Reagan regime. The Democrats' culpability, though, concentrates in the late 1990s go-go years, rife with technology mania, market worship, enthusiastic deregulation, massive financial borrowing and pervasive ethical laxity. The stock market bubble, of course, burst in the Spring of 2000, when Clinton was still president and Summers was treasury secretary. Rubin, in turn, was busy helping guide Citigroup to its contemporary disrepute.

Perhaps Obama doesn't understand this. Perhaps he does, but counts on the public not to remember (indeed, most voters probably don't). Neither explanation is cheering.

Early evidence of an unacknowledged Wall Street partnership strategy came when the new president named Clinton's chief fundraiser and late 1990s White House political director, Rahm Emanuel, as Obama's own White House chief of staff. Earlier this decade, Emanuel spent several years as an investment banker (managing director) at Wasserstein Perella in Chicago where he made $16 million arranging deals between politically-connected utilities. He also served as a director of the Chicago Mercantile Exchange. Emanuel understands how finance has been shifting its national political donations towards the Democrats.

Next came the choice of the new treasury secretary, Tim Geithner. He served in the late nineties as Clinton's Undersecretary of the Treasury for International Affairs, where he helped arrange some of the Asian currency bailouts and deals. He facilitated with such aplomb that several years later a special Wall Street committee recruited him to be the President of the New York Federal Reserve Bank. This is a key liaison position -- as in key to the candy store -- between the Fed and the New York financial community. Prior to Obama's election victory, Geithner was part of the troika (with former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke) managing the Bush administration's 2008 financial bailout. Geithner's particular focus involved the quarter-trillion-dollar combined relief packages for American International Group and Citigroup.

Obama then named Clinton's last treasury secretary, Lawrence Summers, to outrank Geithner as head of Obama's National Economic Council. Summers is remembered for helping to block federal regulation of financial derivatives and helping to orchestrate the 1999 repeal of federal legislation that was holding up the merger ambitions of Citigroup. After a stop at Harvard, Summers returned to the financial world in 2007 as managing director of D.E. Shaw Group, a secretive Boston hedge fund specializing in exotic mathematical strategies. Count him another bailout enthusiast.

Two other prominent Clinton-era financialistas were also tapped by Obama. Gary Gensler, a Wall Street investment banker who served as a treasury undersecretary from 1999 to 2000, is head of the Commodity Futures Regulatory Commission. For a number of weeks, Senate Agriculture Committee Chairman Tom Harkin held up the nomination because of Gensler's past bias towards deregulation. Mary Schapiro, appointed to head the Securities & Exchange Commission, back in 2008 received a $2.75 million salary for managing the Financial Industry Regulatory Authority. This, readers should understand, is the brokerage industry's self-regulatory body, which did about nothing in restraining toxic products and practices. Overall, these appointments suggest a bias towards collaborative and relatively weak new regulation.

Negative indicator number two lies in continuity with the departed Bush administration and its botched 2007-2008 financial bailout. Of that bailout's three top chiefs, two are still in office -- the hapless Geithner and Federal Reserve Board Chairman Bernanke. The latter's 2007-2008 misjudgments and multi-trillion-dollar commitments have unnerved some of his colleagues, who fear an inflationary grand finale for 2009-2010.

Yet Obama voices no criticism. Before Bernanke went to the Fed in 2006, for Pete's sake, he was chairman of the White House Council of Economic Advisers under George W. Bush. Imagine if FDR had retained Herbert Hoover's chief economic adviser and loyal Republican Fed Chairman in 1933. On top of which, since 1987 the bank-befriending Fed -- first under ex-chairman Alan Greenspan and then under Bernanke -- has been the center of Washington regulatory complicity with finance-sector malfeasance. To think that the pussycat Fed can be turned into a saber toothed regulatory tiger is a deception. Alas, the White House may share it.

Then there's the Treasury, formerly headed by Secretary Henry Paulson, Bush's man. Paulson has left, to be sure, but his spirit (and his aides) linger on under Geithner. Republican Comptroller of the Currency John C. Dugan, treasury's benign bank regulator, is staying on. Assistant Treasury Secretary Neel Kashkari, Paulson's top lieutenant in overpaying for the bank assets bought in late 2008 under TARP, just testified before Congress as an official of the Obama Treasury.

This doesn't quite seem like "real" change. Indeed, that may be because voters (including many grassroots Democrats) haven't fully grasped a different, underlying upheaval. In 2007-2008, Wall Streeters shifted a solid majority of the financial sector's campaign contributions from the Republicans to the Democrats. Obama himself outdrew GOP rival John McCain by $11 million to $8 million, and Congressional Democrats also led. According to the Nation magazine, a progressive beacon, "all told, Democrats netted $68 million in campaign funds from Wall Street." ("Dollars for Donkeys," The Nation, September 1, 2008). Arguably, this represents a latter day consummation of the old late 1990s strategy of Bill Clinton, Bob Rubin and Rahm Emanuel of pulling Wall Street and its donors into a Democratic alliance.

In the very different circumstances of 2009, however, this dalliance could prove fatal, especially if it tempts the White House into financial sector relief measures that work for Wall Street but not for the national economy or the American people.

Kevin Phillips' 2008 book, Bad Money, is coming out in a new post-election edition on March 31.

Comments

[PhilipTaylor]

-Woodrow Wilson, after signing the Federal Reserve into existence

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."

Jefferson
Jackson
Lincoln
Kennedy

All had similar opinions of the Elite Money Changers/Banksters!

Wilson made a HORRIBLE MISTAKE selling out our Country to the MONEY CHANGING BANKSTERS!

We Americans have "PAID FOR IT" for almost 100 YEARS with the periodic HARVESTING of our Small Wealth for the Benefit of the FEW ELITES during recessions and depressions and other events!

They assume Americans are STUPID and have taught us to think short term (Months to Seconds) but the Money Changing Banksters think in Decades and are willing to WAIT for Exactly the RIGHT TIMING to Perform their HARVESTS of our Wealth!

[lightningbolt]

Obama doesn't seem like a guy who would conspire against the people. I think he is being threatened by Goldman Sachs, AIG and the other big banks. They will collapse the economy if Obama doesn't appoint the people they want. The president is not the most powerful man in the US, the bankers are, and they are threatening him. I wonder if there is anything he can really do.

[TJCole]

You see our government Washington in particular, runs on what's is legalized bribery...

So it's not like we really have a governmental government, we have corporate government run for the corporations and by the corporation and of the corporatio­ns..corpor­ations even have "Personhood" sometimes when you don't...so you're not just not a citizen but not even a person anymore...

"It's all for the good of the syndicate, Yossarian..!"

[jhNY]

The financialization of the US has been so successfully pervasive that its power extends even into the mentality of the political class, who cannot see that their former bankrollers are not geniuses in a spot of trouble, but arsonists who would fight all conflagrations with more of the old gasoline. Obama and his inner circle of economic advisors are only too familar with the institutions and personalities central to the current fiasco-- many worked among them, many call those presently toiling therein their friends.
None of this is good for what ails us.

But an electorate that could tolerate the ballot box thievery of Bush, and the brass-throated defense of his illegitimacy by our supplicant sold-out press, cannot be expected to swing from Bible-totin'- faux cowbot to a radical reformer with a real agenda for change, especially given the fetishism attached to centrism in our national polititcs. So we got a reformist centrist who cannot yet bear to see how bereft of value the financial industry and its minions truly are. But Obama is intelligent and aims mightily to succeed. Hope he fixes his intelligence on his own assumptions fast, and sees how they have, to date, misled him.

[mikekc]

Kevin Phillips' pre-Crash books made what was then seen as a radical indictment of the rise of finance, dependence on oil, and moral crusading and how they would combine to continue to reduce the economic prospects for most Americans. I have watched with dismay as Obama continues to go soft on Wall Street. The latest today - they are shocked by the bonuses being paid at AIG but plan to do nothing about it. Probably because Wall Street lobbyists wrote the terms of the bailout agreement.

If Obama embraces, even tacitly, the prosperity of the financiers over improving regulation and standards of living for most people, then he will probably be a one-term President. They cannot create a fake prosperity like Bush did now that the banks don't want to loan money except to people who can qualify for the loans. Without going into debt, only growth in household income will improve this economy. Growth in household income may or may not occur simultaneous to granting preferential treatment to Wall Street. If not, then Obama and the Democrats may be the next target of voter outrage. It would be a tragic irony if an alliance with the Wall Street elites brings down the rest of Obama's agenda.

[jonrey]

I've been a huge fan of Kevin Phillips for some years, having read all four of his recent books starting with the stellar "wealth & Democracy." Like others, I have big concerns about the likes of Geithner and Bernanke. I discuss my concerns here:

http://notesfromtherustbelt.blogspot.com/2009/03/sticky-wicket.html

[veracity]

> "The Obama financial program -- the rest of his agenda, remember, will almost certainly depend on his retooling failed finance -- shows.... weakness, in both policy & retention of prior government officials..... EXTENDING the MISMANGEMENT & PRO-WALL St. BIAS of the 2008 Bush regime bailout.
[Obama's] second Achilles heel, rather than representing the hopes & demands for change from the Democratic Party's grassroots & net roots, involves reenlisting & banking on the big names of the Clinton administration's REGULATORY & BUBBLE-managing FAILURES of the late 1990s, especially former treasury secretary Larry Summers & many proteges of former treasury secretary Bob Rubin." <

Thanks for that, Mr. Phillips. HUGE Fan, ever since reading your "Wealth & Democracy In America" in 2002 (?), wherein you point out that EVERY major fortune in America - including SLAVERY-based fortunes (even Northern fortunes, such as Brown shipping fortune, of Brown University endowment) were created & amassed in __close cooperation with__ the (US) government.

Obama is indeed WASTING the first three precious months of his administration.

It is downright COMICAL just how beholden he is to the Goldman-Sachs retreads of the Clinton AND Bush administrations! Well, as Shakespeare & History tell us, even great men have fatal flaws, have weaknesses they can't control or aren't even aware of.

In this case, Obama, like Clinton before him, is completely MESMERIZED by the BIG MONEY - even though we Americans now realize just how quick the big fortunes are to DEMAND TAXPAYER BAILOUTS for their atrocious bets.

[ChrisFL]

I read Mr. Phillips book when if first came out ,since I have read numerous others along the same lines. Just finished "Contagion" by John R. Talbott , I recommend it for its concentration on the housing bubble. But as Kevin sort of points out in this short piece and as Talbott makes abundantly clear in Contagion until the flow of money is cut off from the financial sector to our elected leaders all of this is just pissing in the wind! I have an idea that I think would take our country back and clean up the political process, quite simply a candidate could only accept donations (limited to a realistic number $2,500) by an entity (person) who has the legal right to vote. No Pac's no corporations but real human voters who put their hard earned cash on the line. Then it will be idea's and policy that will win elections not money. Fat chance of this but until then we will have one mess after another.

[veracity]

Yes, our current political system is LEGALIZED BRIBERY, and the "Democrats" are very nearly as bad (complicit, corrupt) as the blatantly Dixiecrats "can we bring back slavery now?" Right-Wing Republicans of the Bush-Chene­y-DeLay-Tr­ent-Lott-S­TROM THURMOND mold.
(Thurmond ran for president on the Dixiecrat "Segregation today, tomorrow and forevoer" split-from­-Democrats party in 1948....
....and Trent Lott infamously lost his Majority Leader of Senate job for attending Thurmond's 100th birthday party and being caught on video saying "'PROBLEMS' in America would be better today if Strom had won his 1948 campaign for the White House.")

I prefer the good ol' reporting of the old days - "SLUSH FUNDS", "KICKBACKS", "EMBEZZELMENT" are words we used to read all the time, but hardly hear at all today, although today we all know that the DEMOCRATS were RECIPIENTS of at least 1/3rd of that FIVE BILLION DOLLARS that the Financial Companies poured in to BUYING Congress over the past 10 years...

.... in return for which, PELOSI AND OBAMA handed over $700 BILLION - SEVEN HUNDRED BILLION taxpayer DOLLARS - to Bush's SecTreasury Hank Paulson, the former Goldman-Sachs trader (and CHAIRMAN, no less, for 5 years!)

http://wallstreetwatch.org/soldoutreport.htm

----------­----------­----------­----------­----------­----------­--------
It is SIMPLY ASTOUNDING how PELOSI and OBAMA are SO PARTY TO THIS massive finanical fraud, that THEY WON'T DEMAND massive & extensive congressional or criminal INVESTIGATIONS !!
----------­----------­----------­----------­----------­----------­----------

[themodernleader]

Some of those astute and Obama faithful observers reporting on this article appear to dismiss the perilous position this economy and country is in. The money in the hundreds of billions are being given out to the banking and insurance AIG interests while the jobs are being elliminated at a half million a month. Over time, the number will accelerate unless the "stimulus plan" works.
Critics of considerable stature argue that the stimulus program is misnamed. What if they are right? Where willl further money come when our foreign owners and creditors are demanding fiscal restraint to preserve our currency, while making sure to repay a trillions bucks over a finite period.
The money that is going into the black hole of toxic mismanagement is being diverted from recovery andreclaiming manufacturing and jobs for the American people. We are facing disastrous consequences of any futile attempt to restore a bankrupt system. We must recognize the unprecedented corrupt loaning and borrowing and leveraging that has gone on. No country on the face of the earth can or should bail out such human folly and financial calumny. Instead, we must face the facts and let the system collapse and use our brilliance, competence and confidence to restore our economic integrity and balance. Otherwise, our creditors will come to our rescue and possess as our nation lies supine on the ashes of corrupt finance.

[wordvarc]

Message #1.

This isn't Obama's mess.

Message # 2

What will we do together to clean it up?

[JBS]

Message # 3

It don't matter WHO made the mess, Obama's President NOW, ...

If he doesn't take charge and provide some real leadership cleaning it up, he's gonna' get blamed for it.

Obama's letting the people who destroyed the economy with their greed dictate the solution.

And the solution they're dictating is to put the Wall Street banks back to the status quo ante, with no strictures in place to prevent them from doing the same damn thing all over again.

And again.

[wordvarc]

OK.

We will let you be president Tuesday then impeach you Tuesday night for not fixing w's mess.

[rawdawgbuffalo]

Original gangster or Original banker?

[breakingpoint]

Obama can't fix it fast enough and what he's done so far won't be enough, but there is one thing he can do to cover his back end, start prosecuting the crooks and get Congress to make and pass regulations fast.

These scoundrels are still legally ripping us off and if that goes on much longer, more than two weeks, blaming Bush won't matter, Obama will own this mess sooner than he has to.

[veracity]

> "...but there is one thing he [PRESIDENT Obama] can do to _cover his back_ and start PROSECUTING the crooks and get Congress to make and pass regulations fast." <

EXACTLY. BUT! that is PRECISELY what Obama IS NOT DOING.

_NOT_ doing!

Instead, Obama's ENTIRE Financial/econmics team is being led by RAHM EMANUEL (former multi-millionaire broker), ROBERT RUBINS, LAWRENCE SUMMERS, TIM GEITHNER, and Geithner's #2 at Treasury, Mark Patterson.... Patterson A FORMER GOLDMAN-SACHS LOBBYIST!!! ALL the above are SYNONMYOUS with uber-Right-Wing Republican former senator PHIL GRAMM's efforts to DEREGULATE those vast swaths of US financial markets!!

Michelle better pull a NANCY REGAN QUICK!! (Nancy relentlessly worked her husband, President Reagan, to get Reagan to FIRE his out-of-control Chief of Staff, Don Regan)

....before her husband's record is irrevocably labelled "THE GOLDMAN-SACHS CORRUPTION administration."

(Which, btw, is EXACTLY how PRESIDENT GRANT's two terms are remembered - that President Grant, DESPITE HIS administration's MANY SUCCESSES,** is remembered ONLY for the CORRUPTION of Grant's closest officials, secretaries, and aides!)

**(the facts that Grant administration RE-UNITED AMERICA after Civil War...and gave FREE SLAVES THEIR RIGHTS in "Reconstruction South" among many other successes - are almost FORGOTTEN by historians today, who focus ONLY on the GRAFT and CORRUPTION that swirled around Grant's friends-in­-high-offi­ce.)

[twofish]

Prosecuting? His Justice Department is too busy going to court to defend the Bush Administration positions on things like endless detention of "enemy combatants." (OK, they don't call them that any more. Like it matters what you call them while you're holding them without trial.)

[knowBuddhaU]

Thanks, Mr. Philips, I always look forward to your articles.

This is how I see it: just as McCarthy jacked America with threats of Commies under every bed, we got jacked into Iraq by myths of terrorists with WMDs; the McCain campaign tried to jack the election with scurrilous myths about Obama; Chas Freeman got jacked by the Israel lobby; and as the Stewart/Cramer debate has shown, so-called "news" organizations helped jack us into this economic Waste Land.

Looks like a concerted effort to jack the nation.

Ever since I read Confessions of an Economic Hit Man, I've been wondering: who are our EHMs today? Does it have anything to do with people who just can't seem to fail big enough to get fired? How many consecutive mistakes can they make before admitting it's the actual policy, aka disaster capitalism at its finest?

What is our covert financial policy, and its attendant covert ops?

Myths aren't simple lies, they are metaphors, they are vessels. The myths of our day, that is, deliver us as a people into our Promised or Waste Land, exactly as we load them with our intentions. On second thought, a better image is of us in Mother Nature's Waste Stream. Is the earth already voiding us?

Myth-jacking: the state of the art in manuFRACTURing consent.

[sophistwatch]

It is obvious that the financial sector's investments in politics are paying off. The lack of any meaningful shift in mentality towards regulation may well be a casualty of the game of musical chairs Dr. Phillips describes.

Another very unfortunate result of this fox / hen house situation is that the toxic assets on the books of major banks and financial institutions have not been dealt with efficiently or in a timely manner. There has been no real pressure from the WH to call for measures that could unfreeze credit. Because of the overly friendly situation Dr. Phillips describes, the parties holding enormous amounts of bad debt are in no hurry to clean up their balance sheets. The net effect of this is to slow down the recovery.

That might sound like a ridiculous thing to do on the face of it. However, if you realize what the potential implications are for investors who are sitting on piles of cash, it is not the worst thing that could happen.

Dr. Phillips has keenly pointed out, serious conflicts of interest could arise which prove too much to resist. The trademark Wall Street greed that has contributed so heavily to why we are in such a deep hole may, at times, be at significant odds with what is best for our country as we try to make our way out of this mess.

[raywish]

Mr. Phillips, I was so impressed by your book “Bad Money” that I am anxious to hear what you would prescribe as governmental action in the present situation. Conservative economists are recommending “hands off” to the economy. Let the creative destruction of Capitalism run its course. As a child brought up in the 1930s I can only accept this prescription if there are massive relief programs for the unemployed. These would include extensive unemployment benefits and “CCC”,”WPA”, and “PWA” like government projects.

Ray Wishner
(As an aside, my dad as a dentist, traded dentistry for distressed railroad can goods, cleaning services for his office and our home and surprisingly a free membership to the Michigan Avenue Medinah Club where I regularly swam.)

[freshnotbitter]

here is a superb explanation of what is standing in the way of progress in America
http://www.nytimes.com/2009/03/14/opinion/14herbert.html?_r=1
(it is bob herbert's ny times column for today. read it.
there are plenty of good public projects just waiting to benefit the people but democracy is standing in the way. at least the american version of democracy. demo (public) + cracy (power, grasp, control) = public power has turned into olig (the few) + archy (the esteemed decider) = oligarchy with the "few" being the politicians with the right to choose what is best for themselves.

We need to change our government from one in which congress holds the key to action into one in which independent agencies decide what is good and ask congress for the money to fund the project. An infrastructure bank, as envisioned by Chris Dodd, would have stood us all well in this period of our history.

The old ways of doing business aren't working.

BTW, Obama has turned health care reform over to the congress to put a plan on his desk by the end of the year. We all know it will simply be another hopeless bureaucratic power grab cum patronage, special interest sludge,rife with bribery and chicanery. We have great management tools available to us in today's business atmosphere but we aren't using them because we get stuck on the Washington merry-go-round (aas Drew Pearson used to call it)

[sueno]

I understand your overall criticism-
but "real" change did happen,
Bush is out and McSame isn't president.
Greenspan and Paulson were the "problems"
and people like yourself, has yet to really question or blame them.
This was created by Bush and we're lucky Obama won
or we would be having Bush-ville's in every park in this country-