Obama Gets a Mulligan

Obama: More Foolish Appointments and Gridlock, or What?

by Elliott Morss, Morss Global Finance

Introduction

Early last night, I told a few friends that I had already come up with two possible titles for my next article: the one above or if Romney had won: “What Romney Has to Do to Be a Great President“. Below, I offer thoughts on the next few years.

Gridlock

One of the first things Obama did was to pass a stimulus bill. He deferred to Nancy Pelosi on what it contained. And she, along with other left-win g Democrats, larded it up with all sorts of their favorite initiatives. The result was spending bill that had very little immediate stimulus impact (probably the best stimulus feature was the money that passed directly though to lower level governments that allowed them to hold on to workers.

As I reported back in 2009 in reviewing the “stimulus” package:

• Consider the number of Federal departments/agencies involved. You can’t tell me the best way to get stimulus money out in a hurry was to give it to give it out via 28 different government bureaucracies.
• Second, so now in October, nine months after enactment, only $288 billion of the $787 billion, or 37% of the funds, are even available.
• It is somewhat impressive that 40% of the funds available have been “paid out”. A major contributor to this high percentage is transfers made to lower level governments to save jobs.

Okay, a bad start. Did it contribute to Republicans deciding to try to block all initiatives? Probably. Back at the time the stimulus bill passed, Democrats and Republicans agreed a stimulus bill was needed, but after Pelosi made it “Christmas time” for Liberal causes, the Republicans vowed to fight everything the Democrats proposed.

Will things be much different in this second term? One could see gridlock continuing since the Democrats continue to control the Senate and the Republicans control the House. But the dynamics are different:

• Obama is running for his place in history and not re-election;
• Pelosi will probably not continue as Speaker of the House, and
• There is growing pressure from the public for Washington to agree on a sensible, long-term plan to reduce the deficit.

Bad Personnel Choices

When Obama was elected, there were two key challenges, both economic:

• Stabilize the banking sector and make sure such a collapse never happened again, and
• Get people back to work.

So what does Obama do? He hires Tim Geithner and Larry Summers as his economic brain trust.

Geithner cheated on his taxes, got caught, and paid fines. That in itself should have disqualified him for the Treasury Secretary position. Geithner was in charge at the Federal Reserve Bank of New York at the time of the AIG bailout (under the Bush presidency). You might remember that AIG staff thought they could get banks to agree to settle for 60 cents on the dollar. Geithner said no, pay the banks in full. As I have reported, that decision cost the American taxpayers $37 billion. Yet somehow, Geithner’s track record was not enough to deter Obama from appointing him. A bonehead decision!

Larry Summers was an academic followed by senior positions in the Clinton administration. After a short stint as the President of Harvard University, Summers started working in the financial industry. Glenn Greenwald reports that before being appointed, Summers:

“…collected roughly $5.2 million in compensation from hedge fund D.E. Shaw …and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . .Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for a one-day visit to Goldman Sachs.”

In short both Geithner and Summers came to the Obama administration from the financial community. The two operated as a team. They made sure that Christina Romer, the now-resigned head of the Council of Economic Advisers, had little influence with Obama.  Jeff Spross reported that her resignation was:

“driven largely by frustration over her lack of voice in Obama’s economic team, and her inability to get input past the firewall of Larry Summers and Tim Geithner”. And then there is the case of Sheila Blair, the ex-chief of the Federal Deposit Insurance Corporation (FDIC). Blair wanted the Administration to be much tougher on the big banks. Once again, the Geithner/Summers team made sure she had little influence.

I am at a loss over why Obama made these two appointments. There are plenty of good economists without ties to the financial community. Things would be very different if Obama relied on James Galbraith, Paul Krugman, Robert Reich, Laura Tyson, Paul Volcker and/or the many other professionals that were not part of the financial industry.

But Does Any of This Matter? The US Democracy Is Broken

The US Presidential candidates spent $2 billion on campaigns. Undisclosed groups with special interests spent much more. And as I have recently reported, it makes little difference who is President and who controls Congress when it comes to bank safety, the Middle East policy, gun laws, “war” policies, health, education, and energy policies. These are all controlled by special interest groups, and these groups intend to maintain their power.

Conclusions

The above is quite grim, so let me conclude on several positive notes.

Obama was able to get Congress to approve a bill that will fundamentally change the US health care system. This was an amazing feat. The bill has many sections that don’t kick in until 2014. It is good that Obama will be on the scene to work for its complete enactment and to oppose the special interest groups (hospitals, doctors, et al) that are already objecting to some of its provisions.

The Supreme Court: Obama will probably have a chance to make several appointments that will fundamentally change the direction of the Supreme Court. Very important. And in light of the Court’s propensity to limit women’s rights, why would any woman have voted Republican? I don’t get it.

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About the Author

Elliott Morss has a broad background in international finance and economics. He holds a Ph.D.in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance