Beltway Media Invent Populist Tight-Rope for Obama

Posted by Joshua Holland, AlterNet at 10:00 AM on March 26, 2009.

My, here's a fascinating article in the Washington Post. It's revealing both in its uncritical reliance on the received wisdom of the day and its casual burial of what appear to be serious conflicts of interest in a ho-hum throw-away graph.

Let's begin with this lede:

In attempting to harness public anger over the financial crisis on behalf of his budget, President Obama is confronting the politically uncomfortable fact that the success of his long-term agenda and Wall Street's recovery are intertwined.

That depends entirely on what one means by "recovery." We certainly need a functional financial system that performs its core functions -- primarily lending -- adequately. But, as I wrote a few months back, the financial sector has become a large, tumorous growth on the "real" economy:

Here’s a fun fact about the finance industry. Historically, it’s grown and contracted along with the business cycle. When the economy was going gang-busters and businesses were expanding, it was there to provide capital and insurance and connect investors with entrepreneurs and innovators. Then, when the business cycle took its inevitable turn and the economy slowed down, it would contract. But a funny thing happened on the way to the financial meltdown; as the Associated Press noted, "when the Internet bubble burst in 2000, the sector never stopped growing. Instead, it ballooned over the past eight years to around 10 percent of the U.S. economy, puzzling economists."

It’s not such a puzzle. In large part, the continued growth of the sector was based on the explosion in derivatives -- high-value vapor -- rather than anything connected to real growth in the "nuts and bolts" economy.

The recession of 2001 officially started in March, when the financial services sector employed 5.7 million people. At the time, the total value of derivatives held by U.S. commercial banks was estimated to be around $42 trillion. By the third quarter of 2007 -- before the crash -- the financial sector was employing almost 6.2 million people, and the value of derivatives held by American banks had skyrocketed to almost $170 trillion -- almost three times the value of the entire world’s economy.

Presumably, Obama's "agenda" is economy-wide. How'd the rest of America do while Big Finance was growing like a mushroom on a cow-pie:

During the intervening period, the "real" American economy was in doldrums: between 2000-2007, median household income dropped; the number of families living in poverty grew by almost 11 percent and the economy added jobs at the lowest rate in the post-World War II era. (I should add that those employment numbers look a lot worse when you take out the job growth in government and our uniquely inefficient health sector -- between 2001 and 2006, health care added 1.7 million (net) new jobs while the rest of the economy added zero.)

So the connection between Wall Street's health and the broader economy, taken as a given by the WaPo's reporters, isn't that concrete. Or, as economist Dean Baker put it in an interview we did a few months back:

We have to understand, the financial sector is a drain on the economy. That's not a moral statement; it's an intermediate good. This isn't like recreational activities or health care, goods that make us better off as an end in itself. It's an intermediate good, like trucking.

So, if we suddenly saw that more and more of the economy's resources were being used up by the trucking sector, we'd be inclined to say, well, what's going on there? Why do we have 10 percent of the economy in trucking? Of course, we have about 1 percent, but suppose it jumped to 10 percent. We'd think, "we have a really inefficient trucking sector." And that would be the same way we should look at the financial sector.

We need the financial sector so that we can get the money to buy a house, to start a business, to borrow money to send our kids through school, or so they can borrow it themselves. There's all sorts of reasons that we need, and we want a good, working financial sector.

But, when you see it growing exponentially, as it had over the last three decades, well, that should have set off all sorts of warning lights. That's a real problem.

(An aside: Baker writes a column dissecting mainstream economic reporting. The Washington Post is, of course, one of his primary targets and he's noted the paper's tendency to identify corporate-funded right-wing think-tanks as "non-partisan" and centrist joints like the Brookings Institution as "left-leaning." Baker's quoted in the WaPo story, and he's IDed as the "co-director of the left-leaning Center for Economic and Policy Research." Did they tweak his nose intentionally? Probably not -- they have a style guide, and, anyway, who but an über-nerd like me would even notice such a slight?)

The story goes on at length about the supposed tight-rope Obama must walk between using the AIG bonus fiasco as a launching pad for a full-throated populist attack on the economic establishment and working with Big Finance to advance his agenda:

That acknowledgment is reflected in the president's shift in tone from his tempestuous town hall appearances in California last week to Tuesday evening's more sober appraisal of who is responsible for the frozen credit markets, insolvent banks and burst real estate bubble.

He condemned Wall Street "Ponzi schemes, even when they're legal, where a relatively few do spectacularly well while the middle class loses ground" during a March 18 town hall event in California's Orange County, which is now closing elementary schools because of falling property tax revenue. Back inside the Beltway, the president said during his prime-time news conference that some of us "can't afford to demonize every investor and entrepreneur who seeks to make a profit."

In the balance as he attempts to walk this line is Obama's long-term agenda, embodied in the budget he was selling on Capitol Hill yesterday and which a House panel passed on a party-line vote late last night. To build public support for his $3.6 trillion package of plans to reform health care, energy and education, Obama is attempting a kind of transference -- persuading Americans that the excesses crystallized by bonuses for the AIG unit at the center of the financial collapse can only be fixed by the systemic overhaul of the economy represented by his budget.

Politics aside, he's 100 percent correct about that last point. There's a fairly straightforward connection between the structural -- corporate culture and governance issues, our regulatory framework, the tax code, etc. -- and the excesses of "bonus-gate", yet that connection is dismissed as "a kind of transference" in this article.

If Obama is successful, it would not only strengthen the case for his budget but also relieve some of the political pressure on Wall Street, which will help determine the success of his first term. But it is not an easy linkage to make, because it means transferring public desire for immediate action -- and even retribution -- to the promise of a longer-term transformation of the country.

[...]

Obama's attempt to channel public anger reflects the White House's belief that he is constrained against engaging in too much Wall Street bashing -- or outright punishment -- by his reliance on the financial sector to fulfill Treasury Secretary Timothy F. Geithner's new plan for rescuing the nation's banks.

OK, so Obama needs the banks' good will or else they might not buy into the administration's plan to shower them with tax dollars and loan guarantees. Thanks for the insight.

Only after all that verbiage do we get this little graph explaining what else might be at play:

Adding to that constraint is the fact that Obama's campaign received considerable financial support from Wall Street, and that his advisers include several proteges of Citigroup executive Robert E. Rubin, a former Treasury secretary.

And a lot of former Goldman Sachs big-wigs as well. This appears to be at the heart of the conflicts within the new administration as it approaches the economic meltdown.

And Big Finance's influence represents a real danger for Obama, namely that he'll find himself on the wrong side of a wave of populist fury that, once rolling in a clearer direction, will be very difficult to direct towards the appropriate targets.

This kind of thing isn't encouraging:

After declaring that his administration would "pursue every legal avenue" to block the AIG bonuses, Obama was by Sunday signaling that he did not approve of legislation sweeping through Congress to slap a 90 percent tax on the payouts.

Tagged as: media, populism, obama, bullshit

Joshua Holland is an editor and senior writer at AlterNet.