How Obama's Cave in to GOP Extremists Will Devastate the Economy

Obama's failure to challenge the Right's economic mythology is both inexcusable, and a sign that the White House isn't prepared for the major battles to come.
By Joshua Holland, AlterNet
Posted on April 11, 2011

The deal Obama struck with GOP leaders last week will cost our moribund economy around 400,000 jobs. It was a tragic compromise with an unyielding ideological opposition, yet Obama hailed it as “historic,” prompting the Wall Street Journal's plutocratic editorial board to crow that the president has now “agreed to a pair of tax cut and spending deals that repudiate his core economic philosophy and his agenda of the last two years.” They painted it as proof that “Republicans in Washington have reversed the nation's fiscal debate.”

Then came the news today that Obama will introduce a long-term deficit reduction plan, which might include “reforming” (read: cutting) Medicare and Medicaid.

The reality is that slashing public spending while private consumer demand remains in a deep trough is tantamount to economic suicide – every business survey conducted in the past two years has found that business's biggest problem is a lack of customers. Cutting programs that put dollars into the pockets of the poor and jobless and adding to the number of unemployed Americans is the worst thing we can do.

One can argue that the pain that would have been inflicted by a complete shutdown of government would have been so great, and the likelihood of the GOP caucus blinking under relentless pressure from its Tea Party base so slight, that Obama was nonetheless justified in cutting the deal. But his failure to challenge the Right's economic mythology is both inexcusable, and a sign that the White House is not prepared for the next two major battles to come.

The White House reads the polls, and according to Pew research (PDF), four in 10 Americans “said that major cuts in spending this year would not have much of an effect on the job situation.” Another especially confused 18 percent said deep cuts would actually help create jobs.

But that's simply the result of a self-fulfilling prophesy: the administration has conceded the idea that focusing on deficit reduction in this economic climate is something other than insane. They've framed the debate as a choice between deep, “irresponsible” cuts the Tea Party wants to make with a hatchet and intelligent trims the administration would make with a scalpel – Democratic center-right technocracy versus the crazy-right Republican “revolution” inspired by Ayn Rand.

That doesn't portend well for the fights ahead. In the next month or so, Congress will have to raise the debt ceiling – the maximum amount of public debt the government can hold – or face a possible default on the government's obligations. And then Washington will turn to the 2012 budget battle.

Increasing the debt ceiling is usually a routine matter, and the consequences for failing to do so are potentially catastrophic – it would wreak havoc on the financial markets and send an already shaky recovery into a steep backslide. But Republicans are nevertheless expected to once again attach onerous conditions to the bill – holding the economy hostage in exchange for extremely painful cuts to social safety net programs and other, unrelated items on their ideological wish-list.

It will be the result of a Republican party having been emboldened by the administration’s past concessions. Robert Reich compared it to handing over one's lunch money to a bully every day rather than confronting him in a bloody schoolyard fight: it may seem like the least painful approach in the short-term, but it's actually the very worst way to manage the situation.

What the administration should be doing appears clear, at least from the outside. Analysts agree that Obama needs a credible strategy for dealing with this form of extortion going forward. Matt Yglesias suggests a two-pronged approach. First, a “credible, repeated commitment not to surrender anything in exchange for getting congress to agree to the debt ceiling being increased.” Every serious person in Congress knows the ceiling must be raised, and therefore “there's nothing to bargain over.”

The second part is educating the public about what's really at stake in these battles, and in the most dramatic way. Yglesias notes that failing to raise the debt ceiling wouldn't force the government to shut down, it would only limit its ability to cut checks, which would mean that the administration “will be able to selectively stiff people.”


So the right strategy is to start stiffing people Republicans care about. When bills to defense contractors come due, don’t pay them. Explain they’ll get 100 percent of what they’re owed when the debt ceiling is raised. Don’t make some farm payments. Stop sending Medicare reimbursements. Make the doctors & hospitals, the farmers and defense contractors, and the currently elderly bear the inconvenient for a few weeks of uncertain payment schedules. And explain to the American people that the circle of people who need to be inconvenienced will necessarily grow week after week until congress gives in. Remind people that the concessions the right is after mean the permanent abolition of Medicare, followed by higher taxes on the middle to finance additional tax cuts for the rich.

It's the right way to play it, but it was also the case that the battle could have been avoided altogether had the Democrats played hardball last fall when, with control of the House and the polling in their favor, they didn't hang tough in the battle over the Bush tax cuts and failed to pass a 2011 budget. There is little reason to believe they will suddenly grow a backbone with the GOP in control of the House.

But the bigger problem is that it may be too late in the game to articulate an alternative vision for how to restart the economy. They've accepted the terms of the debate – that we have a “deficit crisis” and addressing it, now or in the near future, is integral to our economic future (this assumes that Obama is not himself a dedicated deficit hawk, as some believe). They've validated the conservative myth that we can't afford to keep our elderly out of poverty and provide health care to those who can't afford it. It was Obama who convened the bipartisan “catfood commission” headed by Alan Simpson and Erskine Bowles. Pushing back against these narratives now would represent a heavy lift.

They could have gone another way early on – eschewing the false value of “bipartisanship” and educating the public about what's really at stake. They could have staked out a position that all of this deficit madness is ultimately a way of enacting unpopular policies favored by Wall Street. Over two-thirds of the American public think lobbyists, “major corporations” and “banks and financial institutions” have “too much power,” according to Gallup. But Obama's handlers obviously determined to go another way – to take credit for implementing the Right's disastrous economic voodoo.

In heading off a government shutdown, they may have been right in terms of the short-term political calculus. Polls show that the public would have spread the blame for a shutdown on both parties equally, and although the Democratic base wants a harder fight, the administration nonetheless retains its support.

But accepting the Right's economic discourse as being grounded in reality will result in real and lasting economic pain. And in November 2012, with unemployment still high, the foreclosure crisis continuing unabated and a president who appears weak in the face of a determined conservative movement, the Democrats are destined for a well deserved thumping as a reward for their lack of political acumen, even if Obama himself wins another term by default.

Obama May Compromise on Consumer Agency to Pass Financial Regulation, Please Bankers

Oh, good! Obama just might capitulate AGAIN to the bankers. A government by the bankers, for the bankers. Who knew the banks got the exact man they wanted in the White House? I would have thought they'd rather have a Republican, but  they own both parties, anyway, so I guess it doesn't matter.


Obama May Compromise on Consumer Agency to Pass Financial Regulation, Please Bankers

by David Cho and Brady Dennis

The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency as a central element of the plan to remake regulation of the financial system.

In hopes of quick congressional approval of a reform bill, White House officials are opening the door to compromise with lawmakers concerned about creating a new bureaucracy, according to congressional and some administration sources. 

President Obama's economic team is now open to housing the consumer regulator inside another agency, such as the Treasury Department, though they still prefer a stand-alone agency. In either case, they are insisting on a regulator with political autonomy and real teeth so it can effectively enforce rules designed to protect consumers of mortgages, credit cards and other financial products. 

The administration may also have to compromise on Obama's recent proposal for a rule to limit risky activities at banks by prohibiting them from engaging in many kinds of speculative investments. 

Treasury officials are preparing to send Capitol Hill a toughly worded measure that would bar banks from making certain investments that benefit only the firms' bottom line rather than their customers. But there is little support among either Democratic or Republican lawmakers for this proposal, known as the "Volcker rule," and Senate leaders are now closing ranks around legislation that would leave it to banking regulators, rather than the law, to decide which activities to ban. 

From the start of the Obama presidency, administration officials have made far-reaching financial reform one of their highest priorities, along with overhauling the nation's health-care system. Officials have vowed to put in place new rules and regulators to prevent a repeat of the abuses that precipitated the financial crisis. 

Even as the administration is showing new flexibility, some senior executives in the financial industry have also been coming around, easing some of their intensive lobbying against the regulatory overhaul. Instead of trying to block the proposals for a consumer protection agency and curbs on risky investment practices, these executives are working more closely with Democrats to secure a deal the banks can live with. 

After the White House escalated its attacks on Wall Street earlier this year, some executives concluded that the swift passage of a regulatory reform bill would be in their best interest because it would move them out of the political cross hairs, industry officials said. The adoption of a new bill would also resolve much of the uncertainty about the rules to govern the financial industry, allowing companies to make business decisions with more confidence. 

According to some industry officials, Wall Street executives also sense that they now have a better chance for a relatively favorable bill because the administration is in a hurry to record a major legislative achievement before congressional elections in November. At the same time, some financial lobbyists said they were afraid the administration would unilaterally impose strict new measures on the industry if Congress could not come up with a bill. 

The new momentum has raised hopes within the administration that a bill could be signed before the elections. But the path is still not clear. Administration officials and Democratic leaders have been seeking to win support from Republicans, who could filibuster the bill, without alienating liberals insisting on a new consumer protection agency and tough restraints on Wall Street activities. 

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who is shepherding the effort in the Senate, said Wednesday evening that there is still no final agreement between Democrats and Republicans, and aides said that many vital details remain unresolved. 

"Dodd is willing to be flexible, but there's a limit to that flexibility," said one Senate aide, who spoke on the condition of anonymity because talks are ongoing. "Both sides are going to have to learn to live with things that aren't exactly how they would have written it." 

Still, major components of the measure are beginning to take shape. 

Michael S. Barr, Treasury's assistant secretary for financial institutions, delivered a speech Tuesday that repeated the need for a consumer financial regulator with broad enforcement powers. Absent, however, was a call for a stand-alone, agency -- an intentional omission, a source familiar with the matter said. 

A free-standing agency had been a central part of the original blueprint released by the Obama administration, which said it is essential to have one agency with the sole mission of protecting consumers from lending abuses. In the lead-up to the financial crisis, that responsibility was spread across numerous agencies and often took a back seat to ensuring the well-being of banks. A version of the stand-alone proposal was included in a bill passed by the House in December. 

Dodd has expressed some support for the plan. But Republicans on his committee have said that such an agency would clash with the separate set of regulators overseeing the health of financial firms. Sen. Bob Corker (R-Tenn.), who has been working with Dodd on a revised Senate bill, has called the idea a "non-starter." 

The two men have been exploring solutions that both sides could embrace. On Wednesday night, Treasury Secretary Timothy F. Geithner huddled with Corker and Dodd to go over the work the two senators have been doing on regulatory reform. Only Dodd would comment on their meeting, saying, "There's no deal tonight," but adding that he remained optimistic.

In one scenario under discussion, a consumer bureau would be set up within the Treasury Department. In another, a consumer protection division would be established inside a new national agency to regulate banks. 

The latter idea would upset some consumer advocates, who say they do not want the consumer regulator to answer to bank supervisors. Advocates say these supervisors have shoddy records on shielding customers from abusive financial practices. 

Dodd's legislation, which he is expecting to unveil next week, is also likely to strip the Federal Reserve of much of its authority to supervise banks, government sources said. Few on Capitol Hill want to take up the unpopular cause of defending the central bank, which lawmakers say not only ignored the warning signs of the financial crisis but also has been aloof from the problems of ordinary Americans. 

 

Dodd's bill is also set to include updated language giving the government authority to wind down large, troubled financial firms in extreme cases, congressional and industry officials said. The measure will make bankruptcy the preferred route when firms run into trouble. The government's resolution mechanism would serve as a backstop and possibly could be overseen by the Federal Deposit Insurance Corp.