When one sees Obama explaining the 08 to current financial crisis during stump speeches and rallies, he paints a picture more or less similar to the situation outlined by Talbott, i.e. banks over lending and the eventual burst of the bubble. But what Talbott argues here is that Geithner has set in motion a plan that is slow in nature and benefits the banks much more so than the consumer. The question then becomes: how much is Obama aware of Geither’s (and Summers’) plan, and does he show full support for it?
Before I go any further, I shall issue a quick reminder of the difference between the TARP (Troubled Asset Relief Program) and the Stimulus (formally known as the American Recovery and Reinvestment Act, or ARRA). As Talbott points out, the TARP was the Bush administration and then Treasury Hank Paulson’s response the financial crisis in 08. Critics have argued that, in essence, TARP was a 700 billion dollar gift of unchecked funds. The money was supposed to help banks by buying up their toxic assets (bad mortgage loans, etc), but as Talbott says:
“Immediately after receiving authorization of the funding for TARP from Congress, Paulson reversed direction and decided to make direct equity investments in the banks rather than using the TARP funds to acquire their bad loans.”
TARP was a failure, another stain on the already-not-impressive resume of the Bush administration. But it should not be confused with the Stimulus, passed by Obama (with the support of three senate Republicans) and is currently still working its way to help the American people (in the form of tax credits and new job-related programs).
This brings me back to Talbott’s discussion of the reason why Timothy Geither does not want Elizabeth Warren to head the Consumer Financial Protection Bureau. Talbott argues that not only will Warren’s agency enforce more stringent regulations on the financial system, she might also jeopardize Geithner’s grand scheme of using an ineffective and unnecessarily slow bank recovery method. As Talbott explains:
“The banks have made no secret as to where they will find this increase in cash flow. They intend to soak their small retail customers, their consumer and small business borrowers, their credit card holders and their small depositors with increased costs and fees and are continuing many of the bad mortgage practices that led to the crisis (ARM’s, option pay deals, zero down payments, second mortgages, teaser rates, etc)”
The argument here is that Warren, if appointed, will use all her means to prevent banks to have their ways.
Warren will also expose Geither’s plans of hiding problem loans:
“Unless the banks are allowed to raise fees and charges on their smaller consumer customers, Geithner’s and Summers’ scheme for dealing with the banking crisis by hiding problem loans permanently on the banks’ balance sheets will be exposed for what it is, an attempt at preserving the jobs of current bank executives at the cost of dragging out this recovery needlessly for years in the future”
There are signs of banking system that has noticed that because of their recent screw ups, they have to work twice as hard to prevent changes from happening so that they can keep things the way they are
Talbott’s conclusion is quite compelling albeit somewhat preposterous. If one follows his logic, then yes, Geithner and Summers will try to get Bernanke and Obama on board in opposing the appointment of Warren. But Obama, with Axelrod and Emanuel as his advisers, is a savvy politician. He knows what Warren stands for, that which is what based his political campaign on. To support Warren is to support change, Obama knows this.
Yes, perhaps Geithner will pitch to Obama that “if Warren is appointed the entire world of banking and finance as we know it will come to an end.”
That would be great!