Obama's Squandered Honeymoon: How Botched Bailouts Hamper Healthcare Reform

We live in an era where the effectiveness of government has been denigrated for more than 30 years. The echo chamber of the right, particularly since the election of Ronald Reagan, has sought to intimidate anyone who let the romantic notion into their head that government can help. They even denigrate the New Deal, like it was a bad dream rather than a series of programs that helped many people, and may have saved capitalism from itself.

With the romance of government trampled, the void in social theory was filled by the romance of markets. The free market fundamentalists vehemently promoted the notion that markets were not just a means to achieve social goals. To their way of thinking, social goals themselves would have to be designed to curry favor with the "wisdom" of the market.

In the years from Reagan to Bush II, we experienced "Capitalism Unleashed," as the late Andrew Glyn titled his fine treatment of this period of history. Distribution of income and wealth became more concentrated at the top; productivity growth and profit soared; wages were flat; and finally, outsourcing, foreign direct investment and the stress of bringing labor-intensive, low-wage countries like China into the world economy caused severe adjustment pain. Yet none of this stress really shook the romance out of free market fundamentalism. The pain was temporary, and better times would surely come, they said.

That all changed with the Financial Crisis of 2007.

Entering A World of Pain

The real economic spillovers and side effects of Wall Street-leverage and rocket-science concoctions brought the curtain down on the romance with the unfettered free market. This was a mess that did not need to happen. It was a calamity that will cost the world economy trillions of dollars.

This is the stage that President Obama walked onto when he made his run and was elected to the White House. Government romance had been pounded out of the hearts of Americans for decades. Yet now free market fantasies were in tatters. For Obama, seeds of opportunity were contained in the crisis.

What was remarkable about Obama was his seemingly magical ability to inspire us all to suspend our cynicism about civic engagement and government and give things a new try. Sure, he had help from the dreadful examples of his predecessor's work on Katrina, Iraq, torture and the TARP bailout. Yet he pulled it off, and the idea of a strong leader steering us through a crisis brought visions of FDR into the minds of many.

We took comfort in the notion that "the best and brightest" would be taking over. The Administration promised bold actions on many fronts, including stimulus, climate change, financial regulation, bailout policy and healthcare.

Just after the inauguration, many in the markets felt that a bold financial plan would be announced. It would be something strong -- something like what the team of Summers and Geithner had recommended in the 1990s to the Asian developing countries and Japan. Hopes were high that the return of the dynamic duo to government service would lead to immediate action to restructure the banks and bold steps to regulate the capital markets. All of this would be needed to clear away the financial wreckage and get capital flowing again.

Botching the Bailout

Instead, we got nothing on inauguration day. We got a plan-to-have-a-plan in early February, followed by the announcement of PPIP and infinite forbearance through an intravenous-drip system of capital injections so that the behemoth banks, their executives, their stockholders -- and most profoundly, their unsecured creditors -- could hold onto their money. We got that, coupled with the announcement of AIG bonuses. As a final insult, we heard Administration officials waxing on about the sanctity of contracts while the autoworkers' benefits and pensions were being restructured. The public was rightly enraged.