Posted by: Joshua Green on February 6, 2012
For all their bickering, the Republican presidential candidates don’t have much trouble agreeing that President Obama has been terrible for the economy. Newt Gingrich says he’s “a left-wing radical” bent on fostering “socialism.” Rick Santorum has charged him with “heavy government control that refuses to liberate the private sector.”
Even the normally placid Mitt Romney has been known to erupt in fits of violent fantasy when his thoughts turn to the president’s stewardship. “I am someone who believes in free enterprise,” Romney declared at the CNN debate in South Carolina recently. “I think Adam Smith was right, and we’re going to get hit hard by Barack Obama, but we’re going to stuff it down his throat that it is capitalism and freedom that makes us strong.”
Driven by this sort of rhetoric, a conviction has taken hold among many conservatives that the president is actively hostile to the very idea of a market-based economy. That’s a much different charge than the one Obama seemed likely to face just a few months ago — not that he was too hostile to capitalism, but that he was too accommodating of it. Obama’s indulgence toward the big Wall Street banks after the financial crisis once appeared to be his greatest vulnerability. Some Democrats in Congress can even pinpoint the date on which they believe the American public turned against them and the president, driven by disgust over Wall Street’s unchecked excesses. It was March 15, 2009, when the news broke that executives at AIG would receive millions of dollars in bonuses.
For Obama, the danger of this latter, now mostly forgotten, line of attack is that unlike the current one, it is true: He took a hands-off approach to the banks as part of a larger strategy to stem the crisis, a choice that he has never been very good at explaining, and thus has the potential to hurt him. His administration’s strategy depended on private markets, rather than on the government, and entailed propping up the same banks that had wrought the damage.
When the administration came into office, the economy was shrinking at frightening speed. Treasury Secretary Timothy Geithner and several of his colleagues had dealt with the financial crises in Mexico and Asian during the 1990s and believed they knew how best to stop this one. Along with fiscal stimulus and looser monetary policy, they considered it imperative to recapitalize the banking sector and get it lending again.
Traditionally, after a financial crisis, the government has furnished that money — lots of it. Research by the Cleveland Fed puts the typical cost of such a bailout at 5 to 10 percent of GDP, which would have left US taxpayers on the hook for as much as $1.5 trillion. Obama’s plan (really, Geithner’s) was to persuade private investors to come up with that money. The “stress tests” applied to the largest banks were meant to demonstrate that the banks weren’t about to fail.
From a taxpayer standpoint, the strategy paid off. Investors provided the overwhelming bulk of the needed capital. The catch was that in order to attract them, Obama couldn’t actively interfere with the banks by, for instance, firing CEOs or revoking bonuses, for fear of frightening away the very investors his plan relied on. Pursuing that plan entailed taking an enormous political risk, because it meant that the White House would have to ignore the clamor to punish the malefactors. But as Geithner likes to put it, “In a crisis, you have to choose: Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.”
Two years later, the economy is growing again, albeit slowly and fitfully. In an election campaign supposed to be a referendum on Barack Obama’s first term, it would be useful to debate the efficacy of his actions to stop the crisis and heal the economy. But that’s not the debate that’s taking place out on the trail, at least not in any rational sense. Calling the president a socialist may, regrettably, yield some benefit in the GOP primary. But it’s impossible to claim that Obama is both a socialist and also a pawn of Wall Street — and by opting for the former, Republicans have probably chosen the weaker line of attack.
Joshua Green writes a weekly column for the Boston Globe. Follow him on Twitter @JoshuaGreen.