Paul Krugman’s admirers would never list modesty as one of his characteristics. He has written a column “In Defense of Obama” that begins by explaining that his criticisms of President Obama were correct, but that unidentified others’ criticisms of Obama constitute “trash talk.”
Specifically, Obama “came perilously close to doing terrible things to the U.S. safety net in pursuit of a budget Grand Bargain.” Obama sought to produce a self-inflicted disaster by desperately trying to reach a “Grand Bargain” with Republicans that would have inflicted austerity on our Nation in 2012, “slash[ed] Social Security and [raised] the Medicare [eligibility] age.” As even Krugman admits, we were saved from this catastrophe “only by Republican greed, the GOP’s unwillingness to make even token concessions” to achieve the Grand Bargain. What Krugman omits in the tale is that it was also a revolt by Democratic progressives against the Grand Bargain that saved Obama and the Nation.
Krugman does not, in this column, explain the consequences and implications of the disaster that Obama tried so hard to inflict on us. First, it would help the reader to inform them that achieving the Grand Bargain became Obama’s top domestic priority.
It would have aided the reader for Krugman to explain that as part of the Grand Bargain Obama was also trying to inflict austerity on the U.S. in response to the Great Recession. Had Obama succeeded he would have thrown the Nation back into a second Great Recession – for the reasons that Krugman has often explained. This would have doomed his reelection chances and caused catastrophic losses to the Democratic Party in other 2012 elections.
Readers doubtless would have found it useful to know that that Obama ran for office on the promise of protecting Social Security and Medicare from the cuts he sought to inflict. They also would find it useful to know that once Obama legitimized attacking the safety net programs it would make them fair game for unilateral Republican attacks on the safety net when they took control of the White House.
Krugman blames Obama’s effort to enter into the Grand Betrayal as occurring because Obama was “naïve.” He presents no support for that claim. Contemporaneous press accounts – based on leaks from the White House – revealed that Obama was motivated by a desire for fame. The Grand Bargain was to be his legacy and the fact that the Grand Bargain betrayed his supporters was the factor that demonstrated that he was a statesman. Democratic Presidents establish that they are “serious” by publicly betraying and deriding their progressive base.
Krugman defines Obama’s critics as illegitimate. Krugman labels Obama’s critics as engaging in “Obama-bashing.” Krugman goes on to label progressive critics of Obama as “Obama-bash[ers]” by mischaracterizing the criticisms and then dismissing straw man arguments that he crafts as not requiring refutation because the criticisms are obviously not “serious.”
“There’s a different story on the left, where you now find a significant number of critics decrying Obama as, to quote Cornel West, someone who ‘’posed as a progressive and turned out to be counterfeit.’’ They’re outraged that Wall Street hasn’t been punished, that income inequality remains so high, that ‘’neoliberal’’ economic policies are still in place. All of this seems to rest on the belief that if only Obama had put his eloquence behind a radical economic agenda, he could somehow have gotten that agenda past all the political barriers that have constrained even his much more modest efforts. It’s hard to take such claims seriously.”
Krugman’s argumentation consists entirely of pejoratively labeling any progressive criticism of Obama, crafting weak straw man claims that progressive critics do not make, crafting an alternative straw man policy not advanced by progressives, labeling that alternative straw man policy pejoratively, and dismissing the straw man criticisms and policy alternatives that Krugman falsely ascribes to progressives as so un-“serious” that they require no refutation. The only progressive critique that Krugman quotes, by Cornell West, is one that Krugman states in the first paragraph – a critique that he pronounces accurate in the second paragraph. Three paragraphs later he seems to have forgotten his two introductory paragraphs and implies – but never even attempts to prove – that West is committing “Obama-bashing” in that quotation. If so, then it logically follows that Krugman engaged in “Obama-bashing” when he made the same criticism of Obama that West did. Given that Krugman pronounces his critique of Obama accurate, that necessarily means that when progressives make accurate criticisms of Obama they are engaged in “Obama-bashing.”
Krugman sometimes constructs straw man criticisms that he attributes to unidentified progressives, but sometimes the criticisms he ascribes to progressives are ones that he agrees with. The first purported progressive critique that he attacks is an example of a straw man critique. Krugman claims that progressives are “outraged that Wall Street hasn’t been punished.” As the scholar who has led the critique of the Obama administration’s failure to prosecute the elite (and not-so-elite) senior officers who led the three most destructive epidemics of accounting control fraud (appraisal fraud, liar’s loans, and fraudulent “reps and warranties” in secondary market sales) in history I can attest that Krugman could have quoted literally thousands of specific criticisms I have made about the failures to hold these senior bankers accountable. In this column I’ll address only the portion of Krugman’s arguments for which I have some expertise.
Krugman could have explained why he believed my critiques were incorrect. We could have debated our differences and moved towards agreement. I would have had considerable advantages in such a debate because I know the relevant literature and I have real world experience in holding senior bank officers accountable for their crimes and “clawing back” their fraud proceeds. I also have real world experience with the advantages that arise from holding elite white-collar criminals accountable and the disadvantages that arise when they can commit their crimes with impunity. I think that Krugman understands that this is a debate he could not win, mostly because he agrees with me. Krugman has criticized the administration’s failure to hold the elite banksters accountable. Indeed, in his column attacking “Obama-bashing” he bashes Obama by adopting my critique.
“Let’s be clear: The financial crisis should have been followed by a drastic crackdown on Wall Street abuses, and it wasn’t. No important figures have gone to jail; bad banks and other financial institutions, from Citigroup to Goldman, were bailed out with few strings attached; and there has been nothing like the wholesale restructuring and reining in of finance that took place in the 1930s. Obama bears a considerable part of the blame for this disappointing response. It was his Treasury secretary and his attorney general who chose to treat finance with kid gloves.”
I have never wanted to “punish” “Wall Street.” That would be a nonsensical goal. Corporations are not people and we do not punish geographical areas. We hold individuals accountable for their actions, particularly elite. If we fail to do so we destroy the rule of law and create crony capitalism.
The progressive critique is not that income inequality has “remained high.” The progressive critique is that both income and wealth inequality have surged under Obama with no commitment to reversing that disastrous trend. Krugman does not want to quote progressive critics on this point for the same reason I just explained – he agrees with us and he knows that any other position is indefensible under his own published views.
The third critique that Krugman crafts and ascribes to progressives is that “’neoliberal’’ economic policies are still in place.” This is so vague that it is impossible to respond to other than to say that Krugman has (correctly) made leveled that criticism of certain specific Obama policies. Indeed, while he does not use the label “neo-liberal,” Krugman makes precisely that criticism of Obama in his article condemning “Obama-bashing” when Krugman denounces Obama’s efforts to commit the Grand Betrayal. The odd takeaway is that Krugman has made – and pronounces correct in his “Obama-bashing” article each of the progressive critiques that he now labels “Obama-bashing.”
Krugman’s complaints against progressives become even more clearly straw man creations when he describes progressives’ purported alternatives to Obama’s policies. You know things are going hopelessly off the rails when he asserts that Obama’s unidentified progressive critics advance a single solution to all of Obama’s policy failures. Krugman then describes that silver bullet solution using rhetoric designed to make it sound childish and pronounces his straw man creation so unserious that no one could take it seriously and therefore progressive criticisms of Obama are not worth discussing.
“All of this seems to rest on the belief that if only Obama had put his eloquence behind a radical economic agenda, he could somehow have gotten that agenda past all the political barriers that have constrained even his much more modest efforts. It’s hard to take such claims seriously.”
Prosecuting the Banksters Required No Eloquence or Political Miracles
Krugman’s crude effort to ascribe this silver bullet solution to progressives collapses as soon as we apply the claim to the three criticisms he earlier ascribed to progressives. First, we want to prosecute the elite (and not so elite) senior bank officers that grew wealthy by leading the frauds that drove the financial crisis and the Great Recession. As Krugman agrees, this has cost our Nation over $21 trillion in lost GDP and over 10 million jobs. Why does prosecuting banksters require a “radical economic agenda?” The first President Bush’s administration prosecuted successfully the majority of the over 1,000 defendants convicted in savings and loan cases designated “major” by the Department of Justice (DOJ). Bush wasn’t eloquent.
Obama had the power, in a field in which the Republicans had no ability to create “political barriers,” to hold the banksters accountable. He did not have to reinvent the wheel because we had proven what worked (not of it dependent on Obama’s “eloquence.” He chose not to take the proven steps, with the proven people, who would have held thousands of financial executives accountable for their crimes. Many of us explained publicly what needed to be done, raised the warning that the administration was not taking the necessary steps, and offered to help fix the problems. The Obama administration reacted with a combination of indifference and even scorn.
Krugman has no idea how several thousand prosecutions plus civil actions and enforcement actions against the elite banksters would have transformed the administration. Every prosecution produces multiple local and national stories when the bank officer is indicted, the trial begins, there is key testimony in the trial, the jury reaches a guilty verdict, and the bank officer is sentenced. Now multiply those stories by at least 5,000. There is another positive effect – each of these cases places facts in the public record that the media can quote without fear of being sued for libel or slander. This, plus the wave of convictions, leads to much harder hitting articles explaining the corrupt culture of banking.
The first thing that Obama should have done to hold the banksters accountable for their crimes was to reestablish the criminal referral process at the banking regulatory agencies. Again, we know how to do this and why it is essential to strategic success. As the number of criminal referrals grows at a ferocious rate (we, the S&L regulators, made over 30,000 criminal referrals in a vastly smaller crisis) it creates immense pressure on DOJ to prosecute. This translates to pressure on Congress to approve new hires of FBI and IRS agents and prosecutors. It becomes politically dangerous to block these vital hires.
AS DOJ achieves hundreds of elite convictions, the banking regulators bring thousands of meaningful enforcement actions against senior bank officers, and DOJ and the regulators bring thousands of civil actions against the senior officers to recover the wealth they gained through fraud the world would have transformed in a way that would have created much greater political space for meaningful reform. The hundreds of fraud actions discredit banking and bankers. Their trade associations’ efforts to block meaningful regulatory reform become toxic as members of Congress rush to disassociate themselves from the banksters.
As the regulators aggressively use their administrative enforcement powers to “remove and prohibit” thousands of officers who led or assisted the frauds the integrity of the industry improves rapidly. Prima donna bank CEOs who would otherwise lead the political attack on vital banking reforms are discredited as the evidence demonstrates to the public why it is appropriate to remove them from their positions and prohibit them from reentering the portions of the financial industry that are federally insured.
Each of these dynamics was proven during the S&L debacle. Again, the key is that we know how to succeed and Obama could have done so because the Republicans had no ability to create effective “political barriers” to prevent these prosecutorial and regulatory actions. Indeed, had the Republicans tried to do they would have committed political suicide. No magical “eloquence” required.
It would have been more difficult for Obama to have pushed effectively to reduce income inequality, but there are concrete things he could have done that we urged. Note that by discrediting the banks and bankers through the actions I’ve just described above, the administration would have enormously increased the political space for real reforms on executive compensation. The single greatest source of the growth of inequality at the top is finance. Financial services compensation is grossly excessive, but it is also a leading source of the perverse incentives that drive our epidemics of accounting control fraud and are used to create “Gresham’s” dynamics in the professions and more junior officers and employees that aid and abet the financial frauds. Perverse executive compensation also provides the primary means by which controlling officers loot “their” firms in a manner that makes effective prosecution more difficult.
Obama’s financial regulators could have dramatically reduced the perverse incentives of executive compensation and materially reduced income inequality. The grounds for their action would not have been reducing income inequality, but that would have been one of the important collateral effects of the executive and professional compensation rules. The rules would have been adopted on the grounds that by reducing the perverse incentives of executive compensation the Obama administration would have enormously improved the safety and soundness of the financial industry.
These rules would not have required magic “eloquence” by Obama. They would be more subject than the accountability program I outlined above to political and judicial obstruction, but success was likely if the compensation rules’ rationales were done properly (a task I have taken the lead on in key rules we knew would be challenged in court). The huge advantage the regulators would have had in defending the rules against “arbitrary and capricious” challenges include legal precedents that emphasize the broad scope of the phrase “safety and soundness” and the agencies’ expertise in interpreting the phrase. Most importantly, a rule requiring that high levels of compensation not be paid unless they were based on extremely long-term (a decade) proven results is the kind of rule essential to produce the reality of “aligning the interests” of the CEO and the shareholders. The current compensation practices in finance almost invariably further misalign the CEO’s interests. The current compensation system is “radical” in that it violates all theories of how compensation should be structured to prevent perverse incentives.
The normal problem with cracking down on grossly excessive and perverse compensation in the financial industry is that the bank CEOs will threaten to move the bank’s operations abroad to a country with weaker rules that do not interfere with the CEO’s desire to craft perverse compensation practices. Neoclassical economists react blithely to U.S. firms moving abroad and costing blue collar workers their jobs, but they start screaming when banks do the same thing. In the circumstances of the Obama administration, however, this neo-classical hypocrisy (that is oh-so-unintentionally-revealing of their biases) would have posed minimal threat. The regulators and prosecutors simply had to treat any effort to flee U.S. jurisdiction as a basis for (1) denying the bank all U.S. privileges and (2) making any planned enforcement or civil action and any intended prosecution an urgent priority before the bank and bankers are able to escape U.S. jurisdiction. The combination of these two responses would prevent any exodus of financial firms from the U.S.
While this regulatory approach to reducing inequality through reforming executive and professional compensation would work only in financial industries regulated by the U.S. and firms such as GM bailed-out by the U.S., it would still have a material direct effect in reducing inequality because financial sector compensation represents a grotesquely disproportionate share of total executive compensation. But fixing executive and professional compensation in finance – and explaining very publicly and comprehensively (perhaps even “eloquently”) why it was essential to do so because existing executive and professional compensation systems were deeply criminogenic and further misaligned the interests of the officers and the shareholders could have powerful indirect effects in producing reforms in other industries. Executive compensation in finance also drives the horrible “ratchet effect” that provides the excuse for higher compensation in other industries.
There are other things that Obama could have done to reduce inequality. The single most effective form of fiscal stimulus is reducing or eliminating workers’ social security contributions. The Social Security tax is the most regressive major tax that the federal government collects. We can end Social Security collections within days at a trivial administrative cost. This means that the stimulus is almost immediate and goes disproportionately to less wealthy Americans with a high propensity to consume. By suspending collection of the Social Security tax paid by the workers we produce exceptionally rapid stimulus with the biggest bang for buck.
Obama initially reduced the workers’ Social Security contribution, but he decided to resume collection at a time when the suspension of the contribution was proving exceptionally effective. This was pure madness. The suspension was politically powerful, economically literate, and working brilliantly when Obama decided that he wanted to end the suspension. Suspending the full workers’ contribution would have materially reduced inequality by increasing take home pay for Americans, particularly working class Americans. No eloquence from Obama was required.
Obama could also have begun a major campaign to increase the minimum wage in his first year in office and continued the effort every year. Eloquence would be a small part of this effort. The political benefit of pushing for a very large increase in the minimum wage is that opinion polls show tremendous support for the proposal. The Republicans might block any increase in the minimum wage, but each time they did so Obama could have forced them to pay a political price.
Continued ‘Neo-Liberal’ Policies
I do not know what Krugman means by the phrase and there is no sense guessing.
Dodd-Frank: “A lot better than nothing”
Krugman’s phrasing makes it clear that he knows that Dodd-Frank is a deeply inadequate response to the financial crisis. He argues that despite its many weaknesses it has made three contributions that may reduce the harm of future crises.
“Dodd-Frank is a complicated piece of legislation, but let me single out three really important sections.
First, the law gives a special council the ability to designate ‘systemically important financial institutions’ (SIFIs) – that is, institutions that could create a crisis if they were to fail – and place such institutions under extra scrutiny and regulation of things like the amount of capital they are required to maintain to cover possible losses. This provision has been derided as ineffectual or worse….
MetLife is making an all-out effort to be kept off the SIFI list; this effort demonstrates that we’re talking about real regulation here, and that financial interests don’t like it.
Another key provision in Dodd-Frank is ‘’orderly liquidation authority,’’ which gives the government the legal right to seize complex financial institutions in a crisis. This is a bigger deal than you might think. A third piece of Dodd-Frank is the Consumer Financial Protection Bureau.”
Systemically Dangerous Institutions (SDIs)
As Camus warned, the first step in dealing with a plague is to call it by the right name. The “too big to fail” (TBTF) banks are not treated that way because they are “important” or “virtuous.” They are TBTF because they are dangerous – the regulators fear that the bank’s failure could cause cascade failures at other banks. Krugman admits this fact: the basis for classification is that they are “institutions that could create a crisis if they were to fail.” They are systemically dangerous institutions (SDIs) and they should have been broken up and shrunk to a size where they no longer endangered the global financial system. Most economists believe that the SDIs are so large that they are deeply inefficient. Because SDIs receive an implicit federal subsidy even conservative economists have stated that they make meaningful competition impossible.
Dodd-Frank does not even attempt to end SDIs or remove their implicit subsidy that makes effective compensation impossible. Obama would have found it extremely difficult to end SDIs, but he was the only President who had the chance to do so and he never he considered trying to do the right and vital thing.
Dodd-Frank is useless against SDIs and potentially dangerous because it is being sold as a real protection. Creating complacency without effective reform increases the risk of future crises. We did not need the Dodd-Frank bill to provide “extra scrutiny and regulation of things like the amount of capital they are required to maintain….” We could have done that under existing regulatory and supervisory powers over banks. Krugman continues: “This provision has been derided as ineffectual or worse….” As I have just explained, at least with regard to banks, “the provision” is simply redundant. We have had the statutory authority to impose higher capital requirements for decades and “extra [supervisory] scrutiny” since the creation of federal banking regulation in 1863.
The provision is “ineffectual” against the implicit federal subsidy of SDIs. That means it is ineffective in restoring real markets for banking services. It is dangerous because it is being pitched (falsely) as a meaningful protection, which creates regulatory complacency. A fatal problem with the “provision,” which the Financial Crisis Inquiry Commission (FCIC) emphasized, is that banking supervisors failed to supervise effectively when banks reported high profits. Accounting control fraud produces the “sure thing” for a bank of reporting exceptional (albeit fictional) income. Accounting control fraud epidemics drove our three modern financial crises. Relying on higher “capital requirements” for the SDIs when (faux) capital can be created through accounting control fraud represent an Achilles’ heel of Dodd-Frank.
The lack of an “orderly liquidation” provision for a bank holding company is, as Krugman’s column admits, simply an excuse that the Bush and Obama administrations used because they had absolutely no intention of acting against the SDIs by receiving their clear receivership powers. It is revealing that the Obama administration came up with the pejorative term “nationalization” to argue that it was un-American to use receivership powers that we used hundreds of times during the Reagan administration to deal with troubled banks and S&Ls. Again, the fact that Bush and Obama refused to use receivership powers against the SDIs – powers that the OCC has had as regulators for over a century – demonstrates that the problem was will rather than statutory authority.
Krugman notes that Obama met with him and Joe Stiglitz about “temporary nationalization.” Why was Obama meeting with Krugman and Stiglitz about receivership questions? That is a subject that is far outside their expertise, but well within the expertise of scores of us with experience. Why weren’t people like my colleagues and me with a track record of success and the relevant expertise asked by Bush and Obama how to respond to a financial crisis? A Nobel Prize in economics is a personal triumph, but no one thinks it makes the recipient competent outside his or her area of competence and it obviously cannot supply experience. Some very smart people that Obama (and Krugman) would do well to listen to figured out far better answers to the problems Obama faced and proved decades ago that their answers worked.
I agree that it was a good thing that the Consumer Financial Protection Bureau (CFPB) was created by Dodd-Frank. That was Elizabeth Warren’s idea – a progressive. Timothy Geithner, who Obama chose as his Treasury Secretary after he had been the world’s worst senior banking supervisor, sought to kill the CFPB but was thwarted by progressives. Geithner succeeded in convincing Obama not to nominate Warren to run it. Again, the Federal Reserve had the clear statutory authority since the enactment in 1994 of the Home Ownership and Equity Protection Act (HOEPA) to ban one of the three epidemics of accounting control fraud – liar’s loans. Progressives repeatedly urged the Fed to use its HOEPA authority to stop that fraud epidemic. Alan Greenspan and then Ben Bernanke refused – even after Bernanke was informed that the fraud incidence in liar’s loans was 90 percent. Indeed, Bernanke finally used that HOEPA authority in the summer of 2008 (citing the 90% fraud incidence) – and even then delayed the effective date of the rule to November 2009 – because one wouldn’t want to inconvenience a fraudulent lender. It was after this disgraceful behavior that Obama chose to reappoint Bernanke – a Republican – to run the Fed. Senate progressives led the unsuccessful fight against that scandal. The Fed had all the statutory authority it needed to prevent the financial crisis. The Fed leadership lacked the will to act. The CFPB may prove helpful. The idea of having an institution dedicated to protecting financial consumers is a sound concept developed by progressives over the opposition of senior Obama administration officials.
One group of Americans is being bashed with no honest basis. The group constitutes among Obama’s most loyal supporters at the polls with very high turnout. The group has been bashed for decades by “new Democrats.” It has been recurrently bashed by Obama. It is now being bashed by Krugman. That group is progressives. The sad part of Krugman’s column is that the progressives were correct on each of the issues I’ve written about (which include all of Krugman’s points about banksters and the economy). Instead of praising them, Krugman joins Obama in bashing progressives for taking positions that Krugman admits are correct, indeed positions that he has supported in his writings.