The President of the United States says the world is facing the worst financial crisis since the Great Depression. The US Treasury Secretary, as quoted in the Wall Street Journal, has two big tasks before him. "The first is to "minimize the damage as the world works its way out of the excesses" of lending and speculation that almost inevitably led to the crisis. And, second, "to focus on how the architecture or framework of the global financial system is going to change over time ... to deal with the next crisis." The US government's response to the grave systemic threat, framed by the likes of Larry Summers, comes under scathing attack from the economists Jeffrey Sachs, Paul Krugman and Joseph Stiglitz.
But that was 1998, why bring it up now?
Well, you probably know why. It feels like deja vu all over again. The persons involved are a decade older, two of them have received Nobel gongs in the intervening period, but Sachs, Krugman and Stiglitz, along with a number of Leftish thinkers, are once again ranged against Summers, who was assistant to Robert Rubin in the Clinton era and is now advising Treasury Secretary Timothy Geithner.
I'm not familiar enough with the world of finance to fully understand the Summers-Geithner plan, but I get its bare bones, as well as the main thrust of the counter-argument. Geithner-Summers want a public-private partnership to buy up so-called toxic assets. Krugman, Stiglitz and Sachs suggest this is just more genuflecting before Wall Street. Taxpayers will take most of the risks while private financial institutions stand to gain most of the profit, should there be any.
So why did Obama choose this direction? The alternative suggested by free marketeers is to do nothing. If institutions go under, so be it, bailouts are unfair and should never be resorted to. This view, rejected by the Bush administration, was never likely to be adopted by Obama. Of the proposals from the Left, one involves a complicated surgery to divide each institution into 'bad' and 'good' components, but the most popular idea is to nationalise troubled banks.
I believe Obama's decision to take the middle path between doing nothing and nationalisation should be seen in the context of his other acts, which are breathtaking in scope. His budget attempts a fundamental change in energy policy, and inaugurates a significant rethinking of education and healthcare. Two days ago, we got news that the military will be rejigged, ridding it of its big-nations-pitted-against-one-another mindset. Internationally, Obama has reached out to Iran, slapped Israel on the wrist over settlements in occupied territory, shifted policy with respect to Cuba and Syria, recast the nature of the conflict in Afghanistan and Pakistan, admitted the US bears some culpability for drugs-related violence in Mexico, and called for a renewed disarmament dialogue with Russia and an end to nuclear weapons. Each of these is a step leftward that, in less trying times, would have induced outrage among conservatives, but Obama's got away relatively easily because anybody going after him for this stuff right now would resemble Billy Zane chasing Leonardo DiCaprio around the sinking Titanic.
Had the US president decided to nationalise banks, he'd have been bogged down fighting for a proposal deeply antithetical to the way the United States thinks of itself. He'd have spent all his political capital tackling the financial crisis, making it nearly impossible to push through his ambitious agenda on health care, the environment, defense and foreign policy. Had the nationalisation plan, having been put in motion, then failed to right the system fairly quickly, the Democratic party would have been locked out of the Presidency for the foreseeable future, and seen its numbers slide precipitously in the Senate and House.
In this light, it is easy to understand why Obama went along with Geithner's Wall Street friendly plan. It doesn't mean he's pursuing the same studiously centrist path that Bill Clinton did, and I'm surprised liberal commentators have failed to see the wisdom in the approach he's chosen.