Scapegoats, Red Herrings, and Zombie Banks

The last 10 days has been anything but roses for the Obama administration. While the AIG bonuses are largely irrelevant in the whole scheme of things, they are a symptom of a potential larger problem facing this administration.

The AIG Distraction–How does it play in Connecticut?

When news first broke about the shenanigans at AIG that were allowable because of bonus restrictions being stripped from the bailout bill, the White House pointed a finger at already embattled Connecticut Senator, and member of the Countrywide VIP Club, Chris Dodd.  Because Chris Dodd, like Chuck Schumer and most of the congressional delegations of New York and Connecticut, is easily influenced by the Wall Street hacks, Dodd was an easy scapegoat.  To Dodd’s much maligned credit (pardon the pun), he and others would be hard pressed to be anything other than such friends of Wall Street when such a large percentage of their constituents are so reliant on Wall Street for their bread and caviar.

However unscrupulous Dodd may or may not be, there was a little fact about this story that the Obama administration apparently forgot to mention. It was their men, Tim Geithner and Larry Summers, who had lobbied Dodd to strip the bonus restrictions in the first place. Senator Dodd, of course, was quick to point this out. While Geithner, Summers, and team have had barely two months to formulate a response, their ineptness to even get out of the batter’s box lately makes one wonder if Obama may have sacrificed the wrong lamb when it came to tax issues. It sure seems now that Timothy Geithner may have been a better fall guy.

What’s the Dilemma Guys?

When AIG isn’t being blamed for all of our current troubles, it’s the lobbyists. The Obama administration’s response to this situation seems to be an insistence on having it both ways. They claim the “change” mantle and a new way of doing things in Washington, but yet at the same time, they are finding that it is virtually impossible to field a competent staff to address the unparalleled challenges facing our country without hiring at least some experts who have spent some time lobbying. Virtually all of those who have had previous government experience have spent at least some time in some lobbying function. “The rotating door” is alive and well and will take decades to remedy. While efforts at stopping this trend in the long run are noble ideas, suddenly stopping this trend to hire those without any type of lobbying experience means that you de facto are eliminating most of those who have any previous top-level government experience. Of course, new blood is surely needed, but to staff the entire upper strata of government with neophytes in this current environment makes little sense. Therefore, while lobbyists may be good bogeymen to go with the AIG executives, they seem to be the least of our worries. The bigger issue seems to be an utter lack of political will on behalf of the Obama administration and many in the United States Congress.

Socialists and Communists, Oh No!

Just as no Democrat could go to China during the Cold War (Dick Nixon of course could), it seems that no Democrat can muster up the political will to do what is right–temporarily nationalize several of the larger banks. This is something that has been called for by many liberal (in the economic, free market sense) economists and publications such as The Economist. This is anything but a fringe idea.

Instead, Tim Geithner announced today that the government will form “public-private partnerships” to help out the banks. The problem with this approach is is that many economists seem to doubt that the private sector will in fact buy much of these assets.  In fact, the plan basically entails the government subsidizing private investors to buy bad assets. If the assets are in fact undervalued (as Geithner is betting the farm on), then the private investors will make it rich off of Uncle Sam’s dime.  (Of course, this would also likely mean the economy would likely start rolling again and millions of jobs may reappear–presto!) However, if the assets are not really undervalued, as Paul Krugman speculates, then these private investors will simply walk away from the losses. It seems to be more of the same–the public bearing the risk with investors reaping most of the benefits. It certainly sounds good for Wall Street–the Dow was up 500 points today!

To Geithner’s credit, he also mentioned today that there must be new regulations put in place that stop the same moral hazards that got us into this mess in the first place. The problem is that these regulations seem to be something to eventually get around to in the future. In the meantime, more of our tax dollars are going to prop up zombie banks, without much control over where the money goes. In other words, the same people who got us into this mess are still running the same companies under the same set of rules that existed for the last decade. Plus, we’re giving them more money to boot! Does anyone see a problem with this?

Is it possible that the Obama administration cannot possibly do what is economically necessary because of a fear of being called socialists? For God’s sake, they were called socialists during the entire election season and still won in a landslide. If anything, this was a landslide of socialism. You might as well own it if it what is necessary for national economic recovery. As a free marketer and University of Chicago grad, I, of course, am not a big fan of long-term government interruption of the markets. However, I also am not a fan of zombie banks being propped up by the government. The best economic (although apparently not political) solution seems to be obvious. These banks need to be temporarily taken over, divvied up, sacked of most management, and sold off once solvent again. If this is not done, we risk the chance of a lost decade similar to what Japan faced in the 1990s. Temporary nationalization sure beats a decade of no growth.

But instead, the Obama administration, lead by friends of Wall Street within the administration and Congress, apparently plan to do what’s best for the executives and what seems to be politically palatable. However, like it or not, if the economy fails to rebound in a few years, the Obama administration will be blamed for it. It’s as simple as this. They must do what’s necessary to turn around the economy, no matter what labels it may lead to. They must be bold. They must be independent. They must shed away fears of socialism and embrace what’s right. Because, in fact, showing that companies that fail will not be allowed to survive is anything but socialism. It is the true nature of the free market. Without such consequences, we encourage moral hazard and the adverse behavior that have plagued our markets in recent years. Those who make bad decisions must be held accountable for their actions. Those who fail must be allowed to fail so that there is room for the new best ideas to flourish. Every so often it is necessary to flush out the waste to achieve new growth. Sometimes government is the only entity with the buying power to successfully flush out this waste while avoiding complete economic collapse.

It is not the ideal situation. But it is the best worst option in these worst of times. It is about time the Obama administration be honest with the American people and do what’s right for everyone, not just for those in Manhattan and Connecticut. It’s time for the best economic solution for the future of our country, even if it’s not the best short-term political decision. This is what real leadership would entail. This is what real change would look like.

Metrics, Mistakes, and Opportunities for Growth

Overall, I am a big fan of metrics. I truly believe that you can’t manage what you can’t measure. Presidents are often measured on a 100-day metric, “The First 100 Days” as a phrase often chirped by the media. Questions have persisted recently about how realistic a metric this is. With President Obama, many believe that this amount of time will not be sufficient to even begin to make a dent in the serious deficits (both moral and economic) that were left behind by the previous President. Some have proposed that the end of 2009 might be a better metric. With most economists speculating that the current deep recession will not turn around under a best-case scenario until late 2009, this seems a bit fairer.

However, after less than 20 days, for many on the far left and far right, Obama’s honeymoon has already ended. No one expected his honeymoon with those on the far right to last long. However, the fact that the far left have in many cases already turned on Obama is disconcerting.  For example, check out some of the comments on this thread from OpenLeft.

Yes, Obama has made some blunders, but I do not believe that these mishaps have been anywhere near fatal errors. Instead of knee-jerk reactions, let’s take a look at two areas where I believe Obama actually has made a mistake, and more importantly, how I believe he can use this mistake as a learning experience. As a human being, everyone makes mistakes, even presidents. The question is not whether a mistake was made during the beginning days of a presidency, but rather whether action was taken to learn from that mistake. In general, this includes a root-cause analysis with corrective action going forward. For example, President Kennedy took the Bay of Pigs failure and used it as the impetus to change the decision-making process in his inner circle. This fundamental change helped get rid of the previous group think and helped avert a disaster in the Cuban missile crisis, which occurred the next year. Yes, the Bay of Pigs was unfortunate. However, if the Bay of Pigs mistake had not happened, the same disaster, at a billion times the magnitude (i.e., nuclear holocaust) could have occurred the following year. Working with the subject of patient safety in health care, I am exposed to this type of analysis all the time. Most errors are not the fault of one person, but rather the result of a misaligned organizational structure that does not catch errors or raise the proper questions.

Let’s take a look at two examples of what I believe have been mistakes and how the Obama administration could possibly learn from them going forward:

1. Tom Daschle Appointment

As a health care policy wonk, I found the developments with Tom Daschle the most disappointing developments to date. As I wrote here, I believed Tom Daschle would have been a perfect fit to get real health care reform through Congress. Granted, I write this before it is clear who Obama’s replacement choice may be, and this choice may surprise us all. However, when it came to the pure Washington knowledge needed to get something through, Daschle was the man. However, this greatest strength also came to be Mr. Daschle’s greatest weakness.  To me, the tax issue was an aside. The biggest problem was that Daschle became emblematic of the Washington insider’s sense of entitlement or the lobbyist rotating door cycle of greed that Obama campaigned against. When taking office, Obama seems to have caved on some of this campaign rhetoric in favor of practicality, with the reality that you must work within the system in order to get anything done.  Overall, this is unfortunate, but largely correct. However, there is a line to be passed; there is a needed sense of accountability and most importantly transparency in government. Tom Daschle crossed this line, and more importantly, did not disclose these transgressions. The fact that no one in the Obama transition raised questions about Daschle’s past lobbying or tax issues is very troubling. The dilemma is that in order to get anything accomplished, you must work within the system (even if you are independently working to change it). However, at the same time, if the system is broken, you cannot try to make lasting change with those who have become one with the system. Finding a cabinet secretary who can meet this requirement is easier said than done.

The solution here is perhaps to create two positions, one for a “health care czar” to handle the political issues and another for Secretary of HHS to handle the technical aspects and realities of health care reform. Ideally, there would also be an independent board appointed outside of the political realm to handle tough decisions related to such issues as cost effectiveness and reimbursement. Such tough decisions must be brought outside of the direct influence of lobbyists. Outside of being a health care expert, President Obama must make sure that he finds individual(s) with the complex mix of insider knowledge and outsider credibility, and most importantly, that any such person is properly vetted.

2. Stimulus Bill Negotiations

Although successful in the end, President Obama severely underestimated his opponents in the negotiations over this package. In a gesture of bipartisanship, Obama offered a large percentage of the bill as tax cuts in his first proposal to Congress, thinking that this would lead to widespread Republican support and easy passage of the bill. This was naïve at best, possibly political malpractice if repeated in the future. One of the big lessons out of this is that outside of a few Republican Senators, the Republican party is not a moderate party. The last two election cycles have defeated most Republican moderates in swing districts and turned the once great party of Abraham Lincoln into nothing but a regional party controlled by the Deep South. There is no incentive for most of these members, outside of people like Arlen Specter who are up for reelection in blue states, to be for a stimulus package. If the stimulus is a success, it doesn’t matter how they voted because the Democrats will get the credit. If the stimulus package fails, there will be a real opportunity for Republicans who voted against it to claim they were in the right. Therefore, a simple logic tree would have shown Obama and his political team that there was no incentive for the Republicans to compromise on this bill.

Hopefully, Obama’s political team will learn from this mistake in the same way that Kennedy’s team learned from the Bay of Pigs disaster. From now on they must give nothing without getting something in return. Bipartisanship only works if someone is willing to meet you in the middle.

Final Thoughts

Overall, the far right needs to be ignored, the far left needs to chill out, and the Obama administration needs to methodologically look at and learn from their early mistakes. If the Obama administration is to be successful, odds are that these early mistakes will be looked back at not as blunders, but rather as invaluable learning opportunities for a young presidency.

Will He or Won’t He? The Investigation Question

If it is true that sitting presidents set the political boundaries for future ones, then the recent hand-off of executive power was truly a gift for Barack Obama. When, in modern presidential politics, has a president been provided with so much room to operate? Not only has he enormous public support, his party’s majority in the two houses of Congress, and a huge, urgent financial crisis affording him opportunity for inventive solutions, but most important, he has the George W. Bush administration preceding him. Having Bush brandish executive power over the Constitution like a swinging ax, the boundaries of what is politically acceptable have been pushed so far that, for Obama, it is like playing football on a field the size of Texas.

Within in the context of the last eight years, Obama has been given free reign over an almost full gamut of the political spectrum to execute his ideas. As such, the combination of revulsion toward Bush, and excitement for Obama, causes each conservative move he makes to be acceptable, and any restoration of common sense to be celebrated as progressive.

And this was apparent from the day of the inauguration onward. In his speech, Obama managed set a conservative tone without hardly a whisper of reaction from most progressive commentators. In invoking the Bible to “set aside childish things” (implying collective responsibility for the financial crisis), and adamantly stating that we will not apologize for our way of life, Obama was able to successfully plant conservative memes because they were wrapped in massive progressive celebration. The fact that both The Daily Show and Bill Kristol picked up on this is highly illustrative.

However, the lesson of context is more instructive when considering Obama’s first actions as president. While his executive orders, such as the closure of Guantanamo, the order for the CIA to follow the Army Field Manual for interrogation, and limitations of government secrecy are welcome, are they cause for progressive celebration? A sigh of relief, yes, but the shoots of a progressive agenda? I’m afraid not. After watching Bush spend eight years bending the Constitution to near snapping point, Obama is merely attempting to restore the document to some recognizable form. And more notable, these were the easy moves. In fact, he had to issue these orders. The public outrage over state encroachment of civil liberties had been swelling to bursting point, and was subsequently channeled into the Obama campaign. He had the mandate and the political will to do so, not to mention the founding ideals of the nation on his side. Really, all he has done has been to put back in place what Bush had removed, while at the same time, continuing militarily, very much, in the same vein as his predecessor: bombing Waziristan and killing 14 people. Because the reversals of Bush policy have been rapid, the ones that stayed the same went almost unnoticed.

The great irony of the Bush legacy, though, is that by conducting his office so disastrously, and, by extension, handing Obama so much political breathing space, it is clear that Obama feels he cannot hold Bush accountable, lest that breathing space disappear. The choice between massive political capital and following the Constitution is a very real one, and one with very high stakes. In attempting to bring the former administration to justice, it is very likely, given the tone set by current congressional Republicans, Obama’s agenda would shrink to zero by potentially instigating a political civil war — memories from the nineties, obviously fresh in Obama’s mind. If Obama finds it difficult now, twisting Republican arms in Congress, imagine his options after he attempts to try Bush and Cheney for high crimes and misdemeanors. Then there’s also a massive economic crisis to address, not to mention his own party’s complicity in the waterboarding program, making it not merely difficult to start an investigation, but nigh on impossible.

To prosecute members of the previous administration would be like lighting a match to a partisan war, causing the mechanisms of Congress to jam up, just when we need it to function as efficiently as possible.

It is clear that Obama regards his options less as a balancing act and more mutually exclusive; a choice between principle and pragmatism. And as you would expect, the choice is not without precedent. There is the much-cited example of Lincoln’s magnanimity toward the South before and after the Civil War, but there is also the more appropriate parallel of the Jefferson presidency. After winning the presidency in 1800, Jefferson struck a remarkably conciliatory tone, when he said at his inaugural address that “every difference of opinion is not a difference of principle.” And this, too, was after an incredibly brutal, partisan election, where it followed an administration that severely curtailed both civil liberties and the freedom of the press. Jefferson prosecuted no one for these infractions of the Constitution, including previous president John Adams. In order for him to keep the union together — a very real concern during the nascent United States — Jefferson had to reach out to northern Federalists. For an avid student of history such as Obama, it would seem he seeks to emulate this pragmatic, albeit contradictory, approach to crisis.

It is easy to imagine the president thinking of how he would best like to be remembered: the man who attempted to bring executive malfeasance to justice, or the man who wrested America from an economic free fall. It is clear which one is most politically viable. And given how difficult it would be to investigate Bush, fixing the biggest economic crisis since the Great Depression would be easier.

The problem remains though, what to do to prevent future abuse of the executive office? And this is one area where progressives can press Obama to demonstrate some progressive mettle.

Speaker of the House Nancy Pelosi famously took impeachment off the table due to her own complicity in the CIA torture program and, unfortunately, impeachment was the only opportunity to hold Bush to account. However, if the Obama administration were to propose a framework where the requirements to hold impeachment hearings would be made easier — specifically, more definitive — it would do much to prevent politicians like Pelosi from fudging the issue, and presidents (and vice presidents) from abusing their office. Though this would probably require a constitutional amendment, it would be the only way of protecting the state from future executive abuse. As it currently stands, the definition of crimes tried by impeachment is woefully ill-defined to be effective and consistent:

The President, Vice President and all civil officers of the United States, shall be removed from office on impeachment for, and conviction of, treason, bribery, or other high crimes and misdemeanors.

As then-House Minority Leader Gerald Ford said in 1970, “An impeachable offense is whatever a majority of the House of Representatives considers it to be at a given moment in history.”

By providing clear definitions of the offenses punishable by impeachment, Obama could demonstrate a willingness to address the crimes of the previous administration without having to sacrifice too much goodwill.

For all the celebrations of Obama’s restoring of civil liberties, it is clear that violations of those liberties must not happen again, and this is where the progressive fight to hold those in power accountable should be aimed.

Two Days > Eight Years?

I’m feeling pretty good right now.

Yesterday, on his first full day in office, President Obama issued three memoranda to executive departments reinforcing his commitment to open government and accountability. For one, he directed departments to comply with the Freedom of Information Act and err on the side of disclosing information rather than hiding it. In 2001, former Attorney General John Ashcroft ordered executive departments to comply with FOIA requests only after exhausting all avenues to prevent disclosure of information. He even emphasized that potential embarrassment or liability is not a good reason to withhold information requested under FOIA. That’s tremendous!

Obama’s memoranda also gives the National Archives the authority to declassify whatever presidential records it sees fit, a stark reversal from an administration that had fought tooth and nail to keep everything it did secret. The potential exists for massive declassification of Bush administration records that are being kept secret for no other reason that it might be embarrassing or might disclose political favors.

That’s really terrible, in case you were wondering. The Bush administration’s default position was secrecy over disclosure, which only served to emphasize Bush’s greater message: the U.S. government works for we the representatives first, then for you the people. Obama’s philosophy is exactly the opposite: he has said several times that he and the rest of our representatives are public servants first, and everything they do should be in that vein of serving the public.

It should go without saying that our government is accountable to us, but it’s been a long time since that’s been true. We have been told that we have no right to know what our representatives are doing, and in some cases, we have been told it is unpatriotic to question the things our government does. Thank you, Obama, for bringing us back to normal.

And then this morning, as promised, Obama signed an executive order calling for the closure of the Guantánamo Bay prison within a year. The fate of the 200-some prisoners left there has yet to be decided: prosecutions under the Military Commissions Act have been suspended for 120 days, pending a review of each prisoner’s case. Guantánamo is littered with people who did nothing more than be in the wrong place at the wrong time, including people who were minors when they were arrested in 2001.

But there’s more! Obama signed another order directing the C.I.A. to use only the interrogation techniques specified in the Army Field Manual, a policy that has been in the works for two years, but was ignored by the Bush administration in a signing statement.

Things are looking good for America. After eight long years, it’s refreshing to see accountability, transparency, and the due process of law finally take precedence over narrow political interest.

Car Trouble? Let’s Bail

With the struggling auto industry predicting its own demise, there has been resistance by some Republicans on Capitol Hill to bail them out. And for those of us who haven’t been comatose the past eight years, we may have a knee-jerk reaction to disagree with anything Republican. So we may think bailing them out is a good idea. But let us not be so quick to judge a policy by its opposition.

“It’s insanity,” said Libertarian Party spokesperson Andrew Davis in a newsletter released Wednesday. “It’s insane that we keep going back to the taxpayers to bailout struggling corporations who, for lack of good management and sound business practices, have become unprofitable. Who in Congress is standing up for the taxpayers?”

When talks began a month ago about bailing out the struggling auto industry, I initially felt a little better about bailing them out than, say, bailing out the financial industry. In my mind, both the financial industry and the auto industry were greedy and stupid. All they wanted was more money, and they didn’t care about any negative repercussions of getting a lot of it.  However, also in my mind was the feeling that while the financial industry was mostly greedy with a good helping of stupid, the auto industry was mostly stupid with a good helping of greedy–and for some reason, I was more sympathetic to the mostly stupid.

Like many individuals, the auto industry had the mindset–sometimes referred to as path dependency–that if it has worked in the past, why wouldn’t it keep working? So, they kept building bigger cars that got fewer miles per gallon. Then, when gas prices skyrocketed, people started buying smaller, more fuel-efficient cars. This left American automakers–who had been building half-ton trucks and wide-load Hummers–with lots full of beasts they couldn’t sell.

Production went down, sales went down, and now they’re nigh unto hopeless. Some may want to blame the American people–who wanted these gas-guzzling mammoths, especially when gas was so cheap–and say that auto makers were going where the market was. Perhaps if things had stayed where they were–with gas prices and demand and such–they would have kept doing well. But when it comes down to it, automakers were being ignorant to the reality of the situation–that people would eventually want cars that ran on alternative fuels. A lack of long-term strategic thinking left the industry too vulnerable to sudden shocks in demand.

So what Detroit needs more than billions of dollars in bailout cash is some good leadership. As has been mentioned by others, the big three automakers need a complete restructuring–not an influx of money. All of the CEOs with their private jets and their fancy suits need to be standing in the unemployment line while new, fresh, smart leaders take the reigns to save the industry.

A government bailout–the very kind these aforementioned Republicans are resisting–doesn’t allow for that to happen and undermines the principles of the American free market economy. You see, the idea of capitalism and free market-ism is that the general population should run the economy. They decide what they want to buy and whom they want to buy it from. Those organizations that make mistakes, sell bad products, or poison their customer will soon be out of business; while those individuals who make bad choices with their money–or lack of money–will soon be begging on the streets.  Every so often, in order to grow in the long run, the market must flush out its waste water. People need to suffer the consequences of their bad decisions or they’ll never learn to do it differently the next time.

But bailouts turn the government into some sort of indulgent parent: “Oh you don’t have money for that? Here let Mom and Dad pay for it. Just promise to pay us back.” And as we all know, when someone has tons of bills to pay, the last people on the list to pay back are always the parents. Just like the $700 billion bailout of the financial industry, an auto industry bailout is not letting capitalism happen. When the government steps in instead of letting the greedy go bankrupt and the stupid go further into debt, that’s not capitalism.

There’s a natural ebb and flow of the economy (this time it’s, admittedly, a large ebb and/or flow). But let people learn from others’ mistakes. Let us be able to look back on this 20 years from now and realize what went wrong and the negative consequences of those actions. Without letting these companies fail, we will create moral hazard. In other words, there will be no incentive in the future to perform better , because, no worries, the government will just bail you out!

But even if the auto bailout does pass, let’s hope that’s the first step and not the last. Money doesn’t solve everything. The only way the money will do any good is if real, radical change takes place from top to bottom. There needs to be an industry-wide shakeup, and new leadership needs to step in, step up, or step out. There needs to be accountability.

Ah, the Sweet Smell of Corruption

Republicans hate regulation, but they love corporate welfare, unaccountability, and opacity. How best to give big businesses a bunch of money while at the same time not solving any real problems and preventing anyone from questioning your actions? A $700 billion blank-check bailout request, that’s how!

Sure, that covers corporate welfare, and it definitely covers hatred of regulation, because, after all, a whole bunch of money isn’t going to fix the problems that caused this mess to begin with! But will this proposed legislation be outside the realm of any possible oversight? 

Wait for it … wait for it … yes! As it turns out, the legislation contains this proviso: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” So not only would Congress be handing Treasury a check for $700 billion, to do with what it will, but Congress will simultaneously be surrendering any oversight — at all, in perpetuity, throughout the universe — over the money or the decisions made by Henry Paulson.

That’s unaccountability I can believe in! I was concerned for a second there that the Republicans would leave the door open for someone to question Paulson’s decisions in the future. After all, the best way to go about resolving crises is to give people unquestionable emergency powers.

You’d better believe no one will be reporting on this aspect of the legislation. Instead, they will be talking about the “compromise” that consists of George Bush telling Democrats what to do, and Democrats eagerly complying.