Obama's Bad Bank Plan Could Destroy His Promising Presidency -- How Do We Push Him in the Right Direction?

By Robert Kuttner, Huffington Post. Posted April 14, 2009.

The political problem is that President Obama has decided to give the Geithner-Summers approach a bigtime try. And until the approach fails, there is little chance that Obama will turn to a Plan B.

But what does "failure" mean? A palpable failure would be that few deals get made, even with all of the taxpayer financing and loan guarantees. But the terms are so lucrative that there will surely be some deals. The most likely scenario is that the banks limp along, Japan style, while the Fed, Treasury, and FDIC dole out money in increments big enough to stave off insolvency, but not sufficiently large to bring the banking system fully back to life. In the meantime, unemployment keeps increasing at something like half a million a month, until it hits double digits. The continuing slump leaves the budget deficit even larger than projected. State and local government keep cutting programs and laying off workers because the stimulus package is not large enough to make up for their revenue gap--and these cutbacks and layoffs contribute to deepening recession.

At some point, it will dawn on the President that the approach is not working, as it eventually dawned on the Japanese. But by the time Obama does propose something bolder, he will have burned through a lot of money and a lot of credibility, and the economic hole will be that much deeper.

So where does this leave all the dismayed progressives who want this administration to succeed as much as Obama himself does, but who fear that Wall Street is leading Obama off a cliff? Most Congressional Democrats feel they need to back their President, even as they use Geithner as a lightening rod. The leadership of the labor movement, though privately skeptical, desperately needs President Obama's goodwill if they stand a prayer of getting the Employee Free Choice Act. In recent weeks, I have been in several conversations with grass roots activists wondering how to organize regular people around something as convoluted and daunting as the details of the bank bailout. Nobody had any silver bullets.

About all that the loyal opposition can do is shed more light on the absurdity of the Summers/Geithner approach and help animate skepticism in the media, the public, and eventually the President. In Congress, one leader to watch is Rep. Carolyn Maloney, chair of the Joint Economic Committee. Her next hearing, scheduled for Tuesday, is must-viewing. It will feature Nobel Laureate Joseph Stiglitz; former IMF chief economist Simon Johnson, whose recent piece in the Atlantic Monthly compared the US to third-world kleptocracies, and Thomas Hoenig, the most outspokenly critical of the regional Federal Reserve Bank presidents.

Maloney is particular brave, since her suburban New York district would ordinarily make her a defender of almost anything Wall Street wanted, on the ground that what's good for Wall Street is good for New York's regional economy. Speaking of which, Maloney's Senate deputy chair is Chuck Schumer, Wall Street's leading water-carrier among Senate Democrats, which makes her doubly brave.

Other important loci of respectful opposition are the Congressional Oversight Panel, whose latest report is also a must-read. Other members of the opposition include Sen. Sherrod Brown, who recently became chair of a Senate Banking Subcommittee on economic affairs, and Paul Volcker, who heads a panel appointed by Obama (which has still not met) was keeping his own counsel for a time, but has begun to be more actively engaged again. This is all still a delicate balance act, less than ninety days into a new administration that progressives must wish well.

We have two big things on our side: reality--the fact that the plan is a Rube Goldberg contraption and a series of conflicts of interest; and Obama's own intelligence and desire not to fail. But it is not easy to play the role of loyal opposition to an attractive progressive president who at times seems almost willfully determined to let himself be captured by Wall Street.

See more stories tagged with: bank, obama, bailout, larry summers, geithner, tarp

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His recent book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."

Liked this story? Get top stories in your inbox each week from AlterNet! Sign up now »