What Obama Should Have Done – Ezra Klein, Part 2
Ezra Klein wrote a follow-up piece to his treatise on the Obama Administration’s decisions and its rationale for those decisions that I commented on a couple of days ago. If you read it, you know that I found him to be a bit of an apologist for the administration, but I suppose you have to be to get access to those people in the first place, and I’m glad he was able to do so.
Who is this kid Ezra Klein? He looks young in his picture, so I call him a kid. And he’s wrong about quite a few things, but I like the way he writes and he’s got some chutzpah to tackle on the topics he does. All in all, I like him.
In his latest piece on the economy and the Obama Administration, titled: “Economic Recovery: What Washington Should Have Done,” a lot of what he says is correct, if a bit, well… pedestrian. I mean, we all understand that the Republicans have been voting like a single cell amoeba since the economic stimulus bill was proposed in the first thirty days of the Obama Administration. They’d vote no on a bill proposing cream in coffee, if they found Obama was for it.
I personally think that they should have to wear matching sweaters if they’re going to vote in unison like that… if you’re going to vote like a glee club, you should have to dress the part. And that way, maybe we could get them to sing out their collective “Noooo” in some kind of multi-part harmony.
The point is that we all see the problem Obama faces across the aisle, right?
So, Klein starts out by acknowledging that the stimulus was too small and couldn’t be spent properly even if bigger, it seems to be what he learned while interviewing insiders for his last piece. I don’t know if he’s right about that… truth is I don’t care, because in trying to tell us what the White House should have done, he misses the entire point right off the bat, just like the Administration did.
The economic crisis that made primetime during the fall of 2008, actually began during the summer of 2007, when two of the ratings agencies announced they’d be downgrading less than one percent of the bonds out there backed by sub-prime loans… PBS’s Frontline, at the time, referred to what followed as “the abrupt re-pricing of risk.”
A more appropriate phrase might have been, “the abrupt reduction in trust,” because that was when investors stopped trusting the ratings placed on securitized debt securities.
What followed, were it only to have involved going long, would have been complicated enough, but when credit default swaps were thrown into the mix… the unregulated short side, if you will… then the whole thing jumped the shark in terms of complexity.
I don’t think there’s any question that the world has never come close to having to grapple with a financial crisis on this scale of obscurity or convolution. Even for those with the background knowledge and willingness to read a few hundred pages of text would struggle to pick up on every aspect of this evolving mess.
Which is why, by the way, the bankers have had such an easy time shifting the blame to the concept of “irresponsible borrowers,” a nameless, faceless enormous group of people in this country that all went out around the same time and bought homes they could not afford. Just a few moments of rational thinking and you realize that it’s a preposterous allegory that would require some sort of spectacular Bondian villain to have put something in the water supply for it to be true.
Nonetheless, America is experiencing the global credit crisis through its housing market, so it is what it is. And I think the willingness for so many among us to accept the ludicrous notion that this whole thing is the fault of irresponsible sub-prime borrowers, comes from what I refer to as the jealousy effect.
It’s simple really… by 2005 – 2006, people were driving around seeing yet another McMansion popping up here or there and they started to wonder how it was that they hade fallen so far behind their peers. They weren’t buying a huge new home, why were so many others able to do so? Had they truly missed out on something they should have seen… “Honey, Bob and Judy are buying another huge home, how come we’re not buy another huge home?” was the unspoken mantra of the times. A certain jealousy had set in among a large percentage of the populous.
So, when the bubble popped during the summer of 2006, the result of Greenspan having raised interest rates 17 times in a row, no one said much about anything. But a year and a few months later, when Ben Bernanke referred to what was happening as a sub-prime crisis, one being caused by irresponsible sub-prime borrowers having bought homes they could not afford, it was as if that huge percentage of homeowners in this country all simultaneously said:
“AH HA! I knew it wasn’t me that had fallen behind it was they who were being irresponsible. Well, fine then… they must be punished and forced to learn their lesson. Who cares if housing prices fall and I lose my equity too. Once the prices have fallen, then I’ll scoop up the bargains and then I’ll be rich, it’ll be my turn, yes… Bwahahahahaha.”
And that’s why we are where we are today… that’s why as Ezra Klein put it in his last article on the Obama White House, “the politics of housing are hideous,” although if memory serves, he was actually quoting John McCain’s economic advisor during the 2008 presidential campaign, Douglas Holtz-Eaken. Or, as I like to call him: The Hyphenating Man.
In any case, the politics of housing are out of whack, as Klein too understands, and perhaps someone who reads this will tell him why. Hey, I want the kid to succeed, and I think all he needs is a few more years under his belt.
My point is that the crisis inherited by the Obama Administration in January of 2009 was like the equivalent of something that might otherwise be studied at CERN’s particle physics laboratories in Geneva, so when Klein starts off his analysis by presenting the unsolvable problem of the stimulus not being big enough, but there being no chance of it being larger and passing, he paints himself into a corner from which no one could emerge.
Perhaps it would help if I explained why I voted for Barack Obama, because I didn’t decide to do so until the very end of the campaign. Well, I mean besides the “Wiley Woman from Wasilla,” that “Mother Mayor from Matanuska,” that Tina Fey Look-alike we all know and love, Fox News’ own… Sarah Palin. I mean, why I voted for Obama… besides her.
I voted for Obama because I believed he could and therefore would, communicate… and that would neutralize the traditional Republican’s ability and tendency to block and tackle anything the Democrats proposed in the way of legislation.
Look, let’s be honest here… the Republicans often oppose things that just plain old make sense, the economic stimulus bill being a fine example, and the reason they can do it is that they simply don’t require any substantive arguments, they’ve learned to go with whatever is handy and can be turned into a sound bite.
I remember the Sunday morning political shows around the time of the economic stimulus faux-debates. It was wall-to-wall Republicans challenging what was originally an $800 billion spending bill by serving up such key counter-points as the money in the proposed bill that was to purchase condoms for high-school students, and pay for the reseeding of the National Mall, which basically runs from the Lincoln Memorial to the U.S. Capitol.
Never mind that the sum total of what they were objecting to was a miniscule percentage of the $800 billion being proposed… the Republicans are not to be deterred by grocery store math. They have developed the ability to just say things over and over again until what wasn’t an issue becomes the reason their constituents aren’t supporting whatever it is they’re trying to stop or oppose.
Since Obama’s been president, I’ve had to ask quite a few from the GOP what the heck they weren’t liking about Obama, because he’s certainly wasn’t a socialist, as they had proclaimed ad nauseam during the last few months of the campaign. In fact, he’s been about as Bushian as one could imagine.
He didn’t close Guantanamo, although I would argue that’s a good thing because we’ll need somewhere to incarcerate the bankers during his second term, should he prevail in 2012. He gave Wall Street everything it wanted and then some. He didn’t pull troops out of anywhere. No public option in the health care reform bill. No regulations of derivatives in financial reform. Extension of the Bush tax cuts. And his latest setback in the senate, the death of his jobs creation bill that was pretty much tax cuts on top of tax cuts. What is it these RNC people want? I’ll bet a nickel that McCain would have made a better Democrat in practice.
To my way of thinking, Obama had proven during the campaign that he could communicate effectively, and he could do so without the mainstream media if necessary. I don’t watch much television news… hardly any, truth be told. But I couldn’t escape seeking and hearing from him every single day online and through email throughout 2008.
So, I figured that Obama wouldn’t allow his agenda to be stymied by Republican talking points that made no sense, and it wouldn’t matter how many times the inane points were echoed on Fox News. I thought that Obama would communicate directly with the American people online, as he had one so masterfully and consistently throughout the campaign. And being a teacher of sorts, he’d explain things to this country, and as a result we’d do things smarter than in the past.
I feel like an idiot saying this now, but I actually believed that Barack Obama would be the first president to transcend the political barriers and force both sides to vote for what was best because the people understood what was best and why. I could never have imagined that anyone could utterly destroy the meaning of the word “transparency” as President Obama has managed to do.
Largely, I understand, that’s been the result of Tim “Transparency” Geithner, who never met a black hole he didn’t like and want to hide in, but still… Obama interviewed him for under an hour, as I understand it, and then hired him. So, if the man from Treasury deserves to be in a cell, it’s on the president to pick up his check.
The question is not what he SHOULD have done, Ezra, it’s what he SHOULD NOT have done that matters.
What Obama should have done upon entering the White House is NOT start debating an economic stimulus spending package that by the White House’s own admission, according to Klein’s last article, was conceived not based on careful analysis as to need, but almost entirely on what Larry Summers and his Rubinesque Deregulating Band of Crony Capitalists considered politically expedient.
I mean, here we had our “smart” president, and the first thing he does upon taking the reins of a nation in real economic peril, is throw together a spending bill whose numbers were pulled directly from the hindquarters of Larry Summers? And now someone is surprised that it failed to solve the most complex economic and financial catastrophe in the history of the world? Seriously, Ezra? Are you feeling me on this? Is that not the single most intellectually bankrupt plan you can imagine?
I taught fifth and sixth grade social studies a few years back and I’m telling you, my kids were way smarter than anyone backing that idea as a sure winner. If that was going to be the plan, they likely could have done better spinning a wheel or drawing little slips of paper out of a hat. In fact, now that I know how the whole thing was done… and I can’t believe I’m even saying this, but that planning process is the only thing that could have actually given credence to the Republican criticisms of its spending on condoms and grass seed.
What President Obama should have done upon moving into the White House is… nothing resembling the “Fire, Ready, Aim” nonsense that went on, he should have done what was most important at that moment… communicate with the American people so they’d start to understand what had happened to cause the meltdown of Wall Street, and what he was doing to address it effectively.
I wanted to see my president take over network television over five consecutive evenings, let’s say from 8-9:00 PM, on Monday, Tuesday, Wednesday, Thursday and Friday. And on each night he could have come into America’s living rooms to teach us about what we couldn’t possibly already know, but was now having a major and terrible impact on our nation, our lives, and the world.
I’ve explained mortgage-backed securities to thousands of people who had no background in finance or investment… people who knew absolutely nothing about the bond market, and they all came away with a pretty good idea of what had transpired that triggered the meltdown of the mortgage market and then housing prices. And I’m not the President of the United States, nor do I have his resources, so I have to think that he could have fared quite a bit better than me, in terms of effectively educating the American people. Ya think?
The people were hungry for knowledge at that moment too… and he was someone they liked listening too… and he was even a teacher, with experience teaching Constitutional Law at the University of Chicago. That no one even considered such an approach is a testament to their arrogance and their lack of respect for the Americans that elected him.
Such an approach would have provided a foundation of knowledge that would have made it next to impossible for the Republicans to mount their goofy universal NO objections to anything Obama. And while the country was learning about what had occurred, the president’s team could have been thoughtfully examining the national situation, and looking ahead at what was unquestionably to come as a result of credit markets being frozen.
Perhaps most importantly, such an approach would have attacked the admittedly hideous politics of housing, by elevating the dialog from the realm of the sound bite into a thoughtful discussion of what we needed to do to in order to save us all from the pain that was otherwise a certainty.
In case someone is thinking that the bankers wouldn’t have liked it, I can only respond by saying: Tough cheese. They got their multi-trillion dollar bailout, so I’m sorry if the newly elected president thinks it important to tell those who would be funding that bailout the truth about what had precipitated the need for such an unprecedented thing in the first place.
And I would have like to see the Wall Street lobbyists and bank-funded PR spokesliars come out in opposition to five nights of carefully constructed education so that we the people would understand what we as a nation needed to do to prevent our living standards from evaporating over the next decade.
Our banker class may not have liked the idea, but they would have sat on their hands like good little boys and girls and watched as the teacher-in-chief took the time to teach us what we now very much needed to know. Or, we would have run them out of town on a rail.
My point, Ezra, my conscientious, erudite and politically astute young man, is that what I’m describing would have changed everything for the first three years of the Obama presidency, and likely for future presidencies as well. Unquestionably, it was the right thing to do for a list of reasons as long as I am tall and then some.
But, you see Ezra… and you didn’t mention this in your “What Washington Should Have Done,” follow-up piece, Barack Obama surrounded himself with a team of advisors that were all cut from identical cloth, and so the one thing he was sure not to get from them was diverse or original ideas.
Like a deregulation family tree, spawned from Robert Rubin to Larry Summers to Peter Orszag to Timothy Geithner to Michael Froman and Jason Furman… even including James P. Rubin, the son of the great man himself… it’s hard to imagine a more inbred group in control of a nation since the Romanoff’s ruled over Czarist Russia.
Rubin was the key architect of the extreme financial deregulation that brung us to this economic dance with financial ruin. And from there he hopped on over to Citibank where he proceeded to utterly destroy one of the world’s largest banks with his speculation in the derivatives of securitized loans and off-balance sheet bullshit.
Can’t we all just imagine that kind of groupthink going on in the White House, with Barack Obama in the center, as all the rest of the insufferable sycophants fawn all over our first African America president, making him feel as if he’s actually in their club… actually in charge, but winking behind his back at their incredibly good fortune to have all gotten back into the corridors of power. It quite literally turns one’s stomach to picture it.
So, Ezra… it’s not about the size of the stimulus, or the hideous politics of housing, none of that should have been allowed to exist and fester through the three years of a president who had the power and ability to effectively communicate with the American people, with or without the cooperation of network and cable television.
And the “game changer,” as you put it, would not have been massive debt forgiveness, in fact, whatever Holtz-Eaken was babbling about to you made almost no sense. You say the following in your article…
“The game changer, however, would have been massive debt forgiveness. This could have been done through a federal program to purchase troubled mortgages and give homeowners better rates, as John McCain proposed late in the 2008 campaign, or by nationalizing the banks and taking the bad debts off their books, or some other option.”
Ezra, I know you know inside that you have no idea what you were talking about there because of the way you finished the paragraph… “or some other option.”
Come on, son… which one are you trying to be there, Beavis or Butthead? Or some other option? You’re proposing a plan for massive debt forgiveness, have no idea what the implications involved would be, and so you wrap it up by saying… well… or something else.
Yeah… heh heh… thinking sucks, heh, heh, doesn’t it Beavis?
You can’t have some sort of massive debt forgiveness, no way, not going to happen. Not even going to be discussed. Heck, you can’t even get the bankers to agree to lower a balance when it would be in the best interests of investors to do that. What planet do the people of the massive debt forgiveness live on, because it’s not this one. You should stop bringing that up, it sounds ridiculous. Or, at least try answering a few of the questions in the paragraph that follows before thinking it’s a good idea again…
You do understand that if you were to mandate the widespread writing down of mortgage debt you wouldn’t be harming the bankers, you’d be taking the money from the Fire Fighters of St. Louis, or the Teachers Federal Pension Plan… places like that. And what about the people who don’t need to have their debt written down… the ones who could and would pay without a writing their balance down? And how much should we make the pension plans sacrifice? How much should each person have taken off their balance? Will it be a taxable event? How will we force Fannie Mae to participate? What about the terms found in the Pooling and Servicing Agreements that don’t allow balance write downs… and all are different, by the way, what about that? And who is going to administer the program? The same bankers who wouldn’t modify loans unless under duress? Do you have to be delinquent to qualify? What’s the impact to your credit score?
Would you like me to go one? I mean… are you kidding me?
From there you proceed straight downhill into the same morass of inadequate understanding that the president needed to extract us from before locking us into the race to the bottom. You say:
“How do you explain to people who decided against buying homes they couldn’t afford that they’re now paying the mortgages of those who made the opposite decision?”
Yep, well I supposed framed in that ridiculous way, there are no answers, are there? Nope, I suppose not. Oh well… look out below ‘cause we’re going down.
Look, Ezra… you don’t need to put your fingers into the Chinese finger trap just because some economic advisor tells you it’s the only way to define a problem. He’s already got is fingers stuck in there, keep yours free and nimble and you’ll find other ways to view a problem and hence other solutions will present themselves. You say:
“… the stimulus was an attempt to grow our way out of the recession, and our housing policies were an attempt to reduce the debt that was keeping us in the recession.”
Okay, so lets go with that line of thinking. Which one had to be dealt with first? Do you start spending to drive growth while there’s a force pulling hard in the opposite direction? Or, do you do something to reduce the force opposing growth before you start?
Another way to view the problem is that foreclosures represent a hole in the bottom of our boat. And we’ve got some buckets and are bailing water… but what do we need to do before we drive the boat towards growth? Get more buckets? Or… should we fix the hole in the bottom of the boat before leaving port?
Metaphors aside, there are several specific things you need to understand in order to intelligently address the economic downturn, or at this point, the deflationary spiral, in which we find ourselves today. And these are not things one needs to check against economic data…
Beginning in July of 2007, the credit crisis overshadowed the housing bubble’s demise as the cause of foreclosures.
- Mortgages of the bubble were designed for refinancing every few years, so the inability to refinance, due to the credit crisis and increasingly underwater loans, could only lead to more foreclosures… which further lowers home values.
- Home values are a part of the American retirement plan, and there are 78 million baby-boomers closing in on retirement in this country, so falling home values will tend to reduce consumer spending, roughly 70% of GDP.
- Reduced consumer spending lowers corporate profits leading to rising unemployment and reduced incomes… which fuels additional foreclosures.
- Wages continue to decline, delays in family formation, aging boomers, growing shadow inventory of homes, lack of qualified buyers, more homeowners underwater, and ultimately strategic defaults, all exacerbate the foreclosure problem.
- While inflation can be addressed by a central bank’s monetary policy, deflation cannot be addressed by centralized solutions, because need is to put money in people’s pockets to stimulate consumer spending… rife with moral hazard.
- As long as home values are falling, consumer spending will keep falling, unemployment will continue to rise, incomes fall, foreclosures rise… downward spiral continues.
“No economic recovery will take hold without serious attention paid to home foreclosures. Consumer spending, the job-heavy construction industry and bank stability hang in the balance.” San Francisco Chronicle, 10-16-2011
And the longer a deflationary spiral is allowed to go on, the harder it becomes to reverse its cost. Those that lived through the Great Depression, for example, never recovered.
The issue that continues to stymie everyone in government appears to be purely political, as exemplified by your statement:
“How do you explain to people who decided against buying homes they couldn’t afford that they’re now paying the mortgages of those who made the opposite decision?”
Now, as I discussed earlier, part of the problem with this type of statement is that it reflects an appalling lack of knowledge of the situation. Obviously, that’s why I said what I did about what the president should have done to educate the citizens of this country beginning on day one of his presidency. And truth be told, I have quite a bit to say about this issue, but if I go into it here this article is going to be longer than the last one, and we can’t have that.
You should know that this is the very reason I started my blog roughly three years ago… because we started blaming the borrowers, and I knew then that was a terrible idea because we’d never be able to fix the problem if that meant bailing out irresponsible sub-prime borrowers. And here we are three years later, and we painted ourselves right into that very corner.
The simple fact is that homeowners not at risk of foreclosure that aren’t interested in stopping foreclosures are taking a position directly opposed to their own best interests. That has to change, because they’re the ones killing us all, and themselves at the same time.
Ezra, do you understand that it wasn’t the borrowers and it wasn’t the loans that caused our economic meltdown… it was the securities and the leverage? We have to stop blaming the borrowers, because it wasn’t the borrowers, it was the banks.
I do have some advice for homeowners who don’t think their neighbors at risk of foreclosure should be helped out in any way…
When you find yourself in a hole… stop digging.
By the way, you’re quite right when you wrap up your article by saying that it’s the Republicans that haven’t and don’t want to “pull the trigger,” as you phrased it. There’s no question about that.
But we’re not supposed to be letting them define the rules of the game, remember? We’re not supposed to be playing their game they’re supposed to be playing ours. And ours was not supposed to be some Wall Street inspired board game where only one player wins, while the rest of the players starve.
We were, after all, about change we could believe in, Ezra… change we did believe in. What should we believe in now?
P.S. I don’t mean to be so hard on Ezra Klein, I think he’s a fine young man, and darn fine writer too. He’s just young, so he’s wrong about this particular issue a little too often, but I see potential in Mr. Klein, so check out his blog here: Ezra Klein’s Wonkblog.