The very odd spectacle of President Obama personally lobbying for Larry Summers - his preferred choice to run the Federal Reserve – came to an end this week when Summers withdrew his name for consideration. The final blow for Summers came when a fourth Democrat on the Senate Finance Committee, in this case Jon Tester of Montana, issued a statement in opposition to Summers.
This meant Obama would have to shift tactics and start negotiating with Republicans on the committee to see if he could still get a majority to advance the nomination to the Senate floor. If a president is battling his own party to get a nomination through the Senate, and if he can’t even get enough party support on the committee reviewing the nomination, something has gone badly wrong for the White House.
The White House had received a wake-up call back in July, when some 20 Democratic senators reportedly sent a letter to the president encouraging the nomination of Janet Yellen as Fed Chairman. Yellen is, simply going by the record, much more qualified than Summers for the job. She has had far more experience at the Fed than any other potential candidate, she has a good track record at calling economic trends (this is relative – no one at the Fed foresaw the 2007-2008 liquidity crisis coming or the housing bubble), and she does not have Summers’ reputation for abrasiveness, cockiness, and massive failure in the private sector (to wit, his management of Harvard University).
It was rumored that one of the signers of this letter was Dick Durbin, Democrat from Illinois. Durbin was one of Obama’s few close friends when he was in the Senate, and as the senior Senator from Illinois he was responsible for showing Obama the way things work in the Senate. Of course, Obama had very little time in the Senate to learn these lessons, since he leapfrogged his career into a run for the presidency. Perhaps he should have paid closer attention to what Durbin was teaching him, because Durbin went on to a leadership position in the Senate, as Senate Whip to Harry Reid. That makes Durbin responsible for counting the votes and pressuring people to line up in favor of the party leadership. For him to take sides in the Yellen/Summers competition should have been a clear warning sign to the White House that Summers was going to be trouble.
Obama paid no attention. He was said to be furious with the letter, and personally went to the Senate to let them know how valuable a public servant Larry Summers was to him. Obama also made the claims public in press conferences. That’s the strongest “he’s my man” statement a president can make, and for awhile things calmed down in Washington. Several media outlets said that Summers was going to be nominated, the latest being a report last week from Nihon Keizai Shimbun in Japan, citing confidential White House sources. Despite this, Democratic senators such as Sherrod Brown, Jeff Merkley, and Elizabeth Warren pressed on with a campaign to dissuade other members of the Finance Committee from voting for Summers. When Jon Tester signed on, it was too much for Summers.
What we’ve seen from this episode is just how personally connected Obama has been to the Clinton brain trust that he brought in during his first term to deal with the financial crisis – men like Summers, Tim Geithner, and behind the scenes Robert Rubin – who supposedly saved the world from Depression. Obama must firmly believe this, despite all the evidence that these men, with their hands-off approach to regulating Wall Street, were as much a cause of the financial crisis as they were the saviors of the world afterwards. Perhaps another take-away from all this is that Obama remains singularly uninformed and unfamiliar with matters economic and financial, and that he would be completely adrift without brainy technocrats around to help him out. He certainly doesn’t give evidence in his press conferences that he can speak fluently and intelligently about the markets or the economy on his own – he always has to refer to his notes and exercises great care in what he says.
This just might be the caution of a man who wants to avoid saying the wrong thing that would then disturb the markets. But there is another element of tone-deafness going on here, and that is that Obama does not have a good feel for how angry the general public has become over Wall Street, big bankers, bank bailouts, the mortgage mess, and the lack of any accountability on the part of these people for the problems they caused. Larry Summers is just one of many poster children for the Washington-Wall Street revolving door that makes it appears as if big finance is running the show, not the politicians. If that weren’t the case, some of these men, in fact a lot of these men, would have been on trial for fraud and sent to prison. Ronald Reagan and George H.W. Bush managed to get over 1,000 bankers brought up before the courts during the aftermath of the Savings & Loan scandals, and Sen. John McCain was publicly chastised for his close ties to one of those felons, Charles Keating.
The only evidence we have that Obama now “gets it” is the meeting he held in the summer with all the heads of the financial regulatory agencies working for him. Supposedly, Obama laid down the new rules for these regulators, telling them that the public expects them to hold the bankers accountable for crimes. This is way, way too late. Agencies like the SEC are so badly understaffed with capable regulators that it will take 10 – 15 years to get them back to where they were in 2000 when George W. Bush, with active help from Alan Greenspan who had already neutered Fed regulators, began firing experienced regulators in every single oversight function. Just look up the record of Christopher Cox to see how much damage a political hack can do when he’s on a religious campaign at the SEC to free up the regulatory “burden” that Wall Street supposedly suffered from.
This is exactly what senators like Brown, Warren, and Tester were worried about with Larry Summers – he was too involved in the deregulation campaigns that allowed Wall Street to blow up the housing bubble to the point that corruption, theft, and malfeasance became epidemic at the height of the bubble. Of course, Janet Yellen was right there at the time, turning a blind eye to all this, especially to the big banks’ efforts to destroy the mortgage paper trails required in the securitization process. The reason 20 senators signed a letter in her support is that it is about time a woman broke through the all-male fraternity that controls the financial markets, and Janet Yellen is highly qualified to do so on all other respects, even if she was part of the establishment that couldn’t see the disaster in the making that was the housing bubble.
If President Obama really wants to tackle corruption on Wall Street, he will find a candidate who has been right all along about the housing bubble, who will be serious about regulating the banks, who will stand up for the consumer against the financial industry, who will work with other regulators to see that the law is enforced and crime is investigated and prosecuted, and who will fix the Fed. This last point is unappreciated among the general public, and perhaps Obama is not aware of it as well, but the Fed is a badly damaged institution. A confidential survey of Fed employees was released a few weeks ago that shows a strong majority of the staff are afraid to speak up against the banks they regulate, because they do not perceive that staff members will be rewarded for being independent thinkers. The Greenspan years – all 19 of them – have apparently done terrible damage to the institution and its regulatory capabilities, and this is the one agency in the federal government that was given even more regulatory powers as a result of Dodd-Frank.
There are few prominent names in Washington or New York who fit this bill. One of the good guys, Neil Barofsky, former Special Inspector General of the TARP bailout program and a fierce critic of Wall Street, just sold out for big bucks as a high-priced attorney at a major law firm. Another good guy, Elizabeth Warren, was chosen by the people of Massachusetts as their junior Senator, and nobody interested in reform on Wall Street wants to see her leave the Senate, where she is a singular and much-needed scourge of Wall Street institutions.
Compounding this, you need someone with the ability to navigate through the entire Quantitative Easing mess that Ben Bernanke will leave behind. Bernanke’s $85 billion monthly give-away program to Wall Street, which is doing almost as much damage to the middle class and to savers as his Zero Interest Rate Program, is well past its due date. It simply has to be reduced and ultimately eliminated, partly because it has been a massive failure in keeping long term interest rates down. Even Wall Street wants it scaled back, because the Fed now owns an extraordinary 33% of all bonds in the 10-year maturity, and is getting close to that percent in the 20- and 30-year bonds. What this is doing is eating up valuable collateral in support of the derivative business, making a liquidity squeeze more likely in that business. Another reason this is starting to matter is that the US Treasury has reduced its borrowing demands dramatically, thanks to the mini housing bubble and a soaring stock market, which have brought in anywhere from $300 billion to $500 billion in unexpected revenues. This just makes the Fed’s QE bite out of new Treasury issuance that much bigger. The odds are nearing 100%, therefore, that the Fed will announce in the next few weeks that it will reduce the Treasury component of Quantitative Easing by $10 billion or more per month.
This will help the new Chairman, whoever that is, take further steps to reduce QE. The political problem will be whether or not the economy can absorb the reduction in federal stimulus that comes from a deficit that is $300 billion or smaller, on top of a Fed that is reducing its trillion dollars a year in subsidies to the banks through QE. That will be quite a blow to the economy, which has improved dramatically for the wealthy, but only at the expense of more problems for the shrinking and stressed-out middle class.
On top of all that, the stock market continues to operate in a fantasy land of euphoria because of the false belief that the Bernanke put and the QE bonanza will be there forever. The major indexes are especially poised for a fall if not a crash. There hasn’t been a serious correction in the market for over a year, the new highs one reads about every day are built on hardly any volume, sentiment is hovering at levels of exuberance only seen at previous market peaks, the number of stocks participating in new highs has shrunk dramatically while stocks hitting 52 week lows have exploded (this is probably the most serious warning sign out there), and nothing has been done to fix the algorithmic and computer-driven problems that are causing the market to freeze up almost weekly, sometimes for hours. Investors think the stock market is invulnerable to a correction because investors have no choice but to put their money in an asset class that has returned 15% this year so far, and more than double in value since the 2009 bottom. The same thing used to be said about the gold market as a hedge against hyperinflation, and then about emerging markets as the only place left in the world with economic growth, and then about the high yield bond market because it was supposedly a safe bet in a world of zero percent interest rates. All of these markets corrected, and severely too. Nobody has to keep their money in the stock market, especially when and not if it turns south.
Finally, let’s put into this brew something far more important, and that is the recent repudiation by the American public of any further military intervention in Syria. President Obama’s arguments in favor of this action were always weak to begin with, and perhaps it is that fact which forced him to submit a resolution to the Congress seeking support for his targeted bombing campaign. Maybe the President was sincere in his belief that the world needed to stand up to any use of chemical weapons and draw a line, and there is something to the argument that the US has the best military capability in the world to do this. But the world wasn’t clamoring for the US to step up, and for the first time in living memory, neither were the American people. The resolution Obama wanted Congress to approve may never have gotten through the Republicans in the House in the first place, based on Obama-hatred alone. But it might not have gotten through the Senate, so fierce was the opposition by the public that was being expressed to Democratic senators.
Even now, Washington politicians are trying to figure out what this all means, but along with the public disgust with Larry Summers, at the very least people are fed up with a lot of the business-as-usual in Washington. This is opening the door for some politician somewhere to take on the military-industrial-Congressional complex, only this time it won’t be as easy for Washington to denigrate such a stance as happened to Ron Paul. The public mood has shifted. You hear it all the time at work, among friends, on talk radio, after church – Americans want their politicians in Washington to focus their attention and taxpayer dollars at home, and not abroad.
Clearly President Obama has been on the wrong side of the public on this matter, just as he was on appointing someone as Fed Chairman, something which in the past would not even have appeared on the public radar. He’s going to have to make some serious political adjustments or he is quickly going to be sidelined in Washington for the rest of his term. Chances are he won’t be making those adjustments with the Fed appointment. He’ll probably swallow his pride, appoint Janet Yellen, and declare it a victory for women, which it will be. Beyond that, however, he is going to have to find out what happened to his inner-populist. That person seemed to disappear the minute he walked into the Oval Office in 2009. Almost everything he has done has put him on the side of the Washington establishment, including his willingness to give the NSA everything it wanted even if it meant lying to the American people about the surveillance that was really going on. The new environment that is beginning to gel is that of the American people in opposition to the Washington establishment, because so many people feel the political cards have been stacked against them in favor of corporations, lobbyists, Wall Street, the military, the surveillance state, the wealthy – whoever has the money to buy the politicians’ votes. Some of these politicians are beginning to adjust to this new environment, which is fueled in good part by disgust with Washington, and even Democrats are willing to work against their own President if it means the voters will reward them for being part of the solution, not the problem. At the moment, President Obama is part of the problem, and it is questionable whether he has begun to realize that.