It's about Obama, not Geithner...

We tend to be over-focused in our politics on publicly visible policy-executing personnel rather than the philosophy and intelligence guiding those people, which hopefully reside in the decisionmaker to whom they report. In the case of Timothy Geithner, that's Barack Obama. The media and the right-wing don't give two cents about Geithner. It's Obama they've been after -- the right-wing to destroy him politically, and the mainstream media to chronicle the carnage and pick over the carcass. It's no accident that a media star like Arianna Huffington joined other on-screen avatars of liberal dogmatism in wanting to heave Geithner over the side, once the vultures appeared to be circling him. Better to burnish their reputations for leading the pack than having tediously to defend the president's political flank.

But once Geithner's plan was actually unveiled, the stock market promptly went up like a rocket. So does that mean Wall Street suddenly loves Obama, as liberals like Arianna were deserting his Treasury chief? No, and here's why: Stock traders -- who aren't exactly political geniuses -- had been in a state of nervous anxiety about Geithner's plan for weeks, fanned by negative media and Republican distortions. On Monday they read the plan, realized it had a chance of working, and were deliriously relieved (Rush Limbaugh may want a depression, but the business community really doesn't). Here's what Steve Pearlstein, an often contrarian and independently thinking financial columnist for The Washington Post had to say, in part: (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR200903...)

...the plan looks to me like it has a good chance of bringing significant amounts of private capital back into the financial system and relieving banks of some of their worst assets. On first blush, the Geithner plan looks rather complicated, but its general design is rather simple:

The government will go in as partner with private investors in newly created investment vehicles that will compete to buy up loans and securities backed by loans that banks want to sell in order to strengthen their balance sheets. As with most investment funds, this public and private equity or risk capital will be supplemented with additional funds that will be borrowed from Treasury, the Federal Reserve or from private investors who will receive a government guarantee that their loan will be repaid.

If the investments wind up making money, the profits will be split with the government in the same proportion as the equity that was put in. If the funds lose money, the initial losses -- roughly the first 15 cents on the dollar -- will be borne in the same proportion by the government and the private investors. Any losses beyond that will be borne by the government.

In the meantime, the banks will be able to strengthen their balance sheets in ways that will allow them to attract new private capital from investors who no longer will worry about the bad loans on the banks' books. They will also have the cash from the asset sales with which to make new loans...

The blogosphere was full of [Paul] Krugman-like criticism of the Geithner plan yesterday, with some complaining that it would be a windfall for hedge funds and other private investors and others arguing that it would fail to attract private capital. It's hard to see how both could be true...

Krugman's assumption...is that the current, depressed market prices for loans is the correct price, from which he jumps to the conclusion that all big banks are insolvent and need to be nationalized. But even a casual observer can see that these markets are broken not simply because many loans are bad, but because of a lack of investment financing. It is the interaction of the two problems -- in econospeak, solvency and liquidity -- that has caused the market to break down and prices to collapse.

As for the nationalization mantra, it's hard to see what that would accomplish. If the government were to take them over and assure depositors and creditors they would be repaid in full -- which is what you need to do to avoid a collapse of the financial system -- then there is little effective difference from a plan designed to rid banks of their bad assets. Nationalization doesn't make the bad loans go away -- it simply moves them from the banks to the government, with the government on the hook for any additional losses.

Pearlstein is paying attention to the substance of what the Obama Administration is going to do, not the theatrics of the surrounding political culture. From both the right and the left, most of the denizens and purveyors of that culture are assaulting Obama's plans and programs because they don't mirror their ideological preferences or they simply want him to fail politically. Unlike Bill Clinton, who habitually divided Solomon's baby and split the differences between his supporters and his opponents in order to cut deals he could celebrate as political achievements (politics being his arena), Obama is engaged in the art of what's politically possible without sacrificing the substantive core of what's needed to resolve the crisis at hand, in order to pave the road to change (the real world being his arena).

Obama is not trying to pull the rabbit of utopia out of the hat of economic disaster. He knows that that would be a bridge too far. Rather he's trying to quell that disaster so that political space remains in which to accomplish what he promised to do in his campaign -- to take the country in a substantially new direction in its economic conduct, its social fairness, its role in the world and, yes, its political culture.

The Geithner Plan and the Krugman Backlash

New York Times columnist Paul Krugman appears to have begun his own personal depression on the news of Treasury Secretary Geithner's plan to separate threatened banks from their nonperforming ("toxic") assets. But in attacking the Obama Administration for collaborating with the banks in order to prevent their implosion, he's made one misleading statement: "...the whole point about toxic waste is that nobody knows what it’s worth." The reality is that that is true only when such assets are sitting inert in a financially threatened bank's portfolio of assets. The only way that a financial asset's value can be determined is through a market, in which potential buyers bid the price up or down. All other methods -- such as a Nobel laureate speculating about its value -- are arbitrary.

Let's think this through: The Geithner plan assumes that lots of investors will buy nonperforming mortgage-related assets if they are stripped from banks and marketed via a public fund. Why? Not only because the government is assuming a good deal of the risk, but also because the underlying mortgages represent ownership of houses that will sell to buyers who can service those mortgages at a certain price, which is not zero (remember that wage-earners, who still comprise more than 90% of employable Americans, have regular income and need housing). If you can't service any longer your mortgage of $200,000 but could service a mortgage of $150,000, and the location of the asset in a fragile bank prevents the asset from finding a new investor, then a newspaper columnist's gloomiest estimate of its market value -- say, $100,000 -- might make it seem very toxic. But we know that such an estimate of that one asset is undervalued, because a $150,000 mortgage can be serviced. Until the asset, representing the nonperforming loan, is priced in a market, its true financial value can never be ascertained. That's the whole point of Geithner's approach: Let the only reliable mechanism (in our economic system) for determining the value of anything, a viable market, do that in the case of these assets.

When the Mellon Bank was on the brink of collapse in the late 1980s, an investment house created a "bad bank" into which Mellon's nonperforming assets were placed. This restored Mellon to solvency, and it became a healthy credit-issuing institution again -- and Pittsburgh heaved a sigh of relief. The "bad bank" eventually sold all of the bad loans, and very little money was lost. The point of doing this was to enable Mellon to do what it was supposed to do: serve the community as a source of credit. The latter is what many banks today cannot readily do because of uncertainty about the weight of these "toxic" assets on the banks' viability. The complexity of the Geithner plan is a function of the sheer scale of the general financial crisis today, as well as the administration's decision to acquire the cooperation of the financial industry instead of terrifying it with the prospect of broad nationalizations and prolonged Washington decision-making about its future.

At the present moment we may not like bankers all that much, because of their past egregious risk-taking, but we are having a historic crisis of confidence in our economic system which is unfolding too quickly for the president and the Congress to invent a whole new financial system, just because a lot of us are outraged and want to punish the bankers, or because some columnists don't want the government to do anything remotely similar to what the Bush Administration might have done. Obama picked Geithner to be Treasury Secretary because he knew he had an excellent working knowledge of the present financial system. Geithner's plan is going to be implemented, because congressional approval isn't necessary. Denunciations of the plan without constructive suggestions about how to improve it will accomplish nothing except fray public confidence in Obama's decision-making. That's the objective of the Republicans and right-wing populists, reinforced by the fear-mongering of most of the broadcast media (and now further abetted by populists on the left). If this onslaught succeeds in lowering Obama's poll numbers sufficiently, the general media may then pronounce Obama a failure, and that could put at risk most everything else that this new president is trying to do.

Paul Krugman has been a trenchant critic of the unexamined love for unbridled capitalism exhibited by the Bush Administration. But whether anyone likes it or not, we still have a capitalist economy, and its abuses have put at risk our collective economic future. Until the immediate effects of those abuses are flushed out of the system, the present toxicity of our national politics offers no prudent context for considering a more fundamental restructuring of the system. Populists picketing financial traders' mansions, gyrating congressmen predicting economic armageddon, and even fervent columnists with cosmic wisdom are not necessarily the best sources of guidance for either that restructuring or the hydraulics of the flushing that's necessary. There's a cooler cat in the White House, and we should listen to and not just lecture him.

Why the media keep getting it wrong about Obama...

Comment on The Field, 3/21-/09:

On Politico today there was a good example of how the media systematically "misunderestimate" Barack Obama: http://www.politico.com/news/stories/0309/20254.html This article piles on the supposed evidence of how President Obama is allegedly overexposed, focusing on the venues of his appearances, his "branding" or his style -- while entirely missing the cumulative content of what he is communicating. One consultant was quoted as being skeptical about Obama "betting the success of his policies so heavily on the strength of his personality," as if the President was merely engaged in a series of personal performances. Just as they did throughout 2008 during the campaign, when the political press corps and their media-consultant talking heads continually criticized Obama for supposedly too-theatrical mass rallies and repetitive, boring town-hall meetings, they are paying far too much attention to the external aspects of his appearances and virtually no attention to what he is actually saying. The public doesn't merely see a presidential candidate or a president, it also listens to what's being said. On the Jay Leno show last night, Obama gave affable, concise, easily understandable but quite substantive answers to Leno's surprisingly numerous questions about the financial and economic problems facing the country. This was 20 minutes of pure, clear content, unfiltered by the disputatious egos and tendentious attitudes of White House pool reporters and political pundits, and it reached 15 million households. It was brilliant political television. We are dealing with an entirely new kind of president, for a new, far more serious time in our nation's life. The people get it. The media mavens don't.

Hillary Clinton's approach to human rights in China

When Secretary of State Hillary Clinton didn't precede or follow her recent visit in Beijing by lambasting the Chinese government for their human rights violations, she was harshly criticized by some American human rights advocates, both progressive and conservative. They overlooked her candid explanation that there were ways of assisting rights and democracy apart from a visiting dignitary denouncing the offending government. Indeed, a few days later, the State Department's annual report on human rights was sharply critical of China, which reacted by bitterly denouncing the U.S. Nevertheless the web site of one rights advocacy group focused on China harshly criticized Mrs. Clinton on its web site: “She chose what makes us animal over what makes us human. What good can come of filling our bellies at the expense of starving our spirit? Where does history tell us that our fortunes will improve by acquiescing to tyranny?” Mrs. Clinton hardly acquiesced to tyranny. This was a hyperbolic statement that probably says more about the ideological frame or emotional reaction of who it was coming from (and it wasn't that smart politically, as a way to persuade the Administration to be more vigilant about human rights).

Since the Tibet crackdown, few if any observers of China have been under any illusions about the authoritarian, repressive character of its government. A routine verbal swipe by Hillary Clinton would have done precisely nothing to make Beijing's rulers think twice about their contempt for the political rights of those they govern. But the world is in the middle of several overlapping crises: a slow-motion but still-unfolding financial panic, a serious nose-dive in production and employment in many nations, the possibly imminent acquisition of nuclear weapons by Iran (as well as the possible use of military force by Israel to forestall it), and turmoil in Pakistan. The Chinese can play a substantial, favorable role in global diplomacy on all of these four problems -- it would be in their interest. And, yes, we need them to buy plenty of Treasury securities so that our domestic, recession-fighting stimulus can be financed. These are all very serious matters. In the long term, there is nothing inconsistent with subdued official U.S. rhetoric about human rights at various moments and quietly increased U.S. assistance to democratic and rights activists around the world who are the ones whose action will really determine whether rights and democracy eventually come to countries like China. Hillary couldn't have liberated China on her first trip there, and she won't be the one who does it anyway.

The President's plan is not a "gamble"...

The British writer Godfrey Hodgson recently wrote on openDemocracy.net that there was a "reality gap" between President Obama's plans to resolve America's economic crisis and the resistance he faces, implying that the president's "rhetorical tools" might not be up to the task and that the "political obstacles" are ferocious (http://www.opendemocracy.net/article/barack-obamas-reality-gap). Another way of putting this, to use a British reference, is that Hodgson sees congressional foxes in the way of a presidential hedgehog. The ancient Greek reference -- "the fox knows many things, but the hedgehog knows one big thing" (revived for modern consideration by Sir Isaiah Berlin) -- is apt. The one big thing that Obama knows is that the American public has decisively rejected not only the specific policies of the previous failed Republican administration, but also Washington's culture of special interests and obstruction of the national interest, which have immobilized the political system for most of the last two generations. By trying to obstruct Obama's proposals, his Republican opponents are merely re-enacting the despised failed narrative. So the president has enormous political wind in his sails, which is predicated on far more than his "rhetorical tools" or the public's yearning that we get through the present economic crisis with the American way of life intact. Obama's proposals are not, as the pundits are now wrongly calling them, a big political gamble, because he realizes that unless his proposals are seen by the people as proportionate to their manifold discontent, their support will quickly wane. He is not gambling on a political opportunity. He is embracing a political necessity. The stakes are no higher for him than they are for his country. The people recognize that the president understands their demand for bold action. That is the reason that he has their respect and, most probably, their patience.