One of the most important lessons of Karl Marx’s Capital is that capitalism is not a self-regulating mechanism (with which the government interferes at its own peril), but a set of government-enforced social relations that structure the production and distribution of wealth. These relationships--depicted in Economics 101 textbooks as “natural” rather than “man-made”--are largely invisible except in times of economic crisis, when they can become key factors in shaping the government’s response.
The current crisis is no exception, though the struggle is not a straightforward Marxian battle between the working class and the bourgeoisie. Rather it is between the big banks, their top execs, and lobbyists on one side, and an angry and anxious public on the other--with the Obama administration and Congress poised somewhere in between the two. The banks, armed with a powerful lobby, an implicit veto over economic recovery, and longstanding ties to key legislators and White House officials, have been able to hold their own. In a series of critical decisions, the banks may even be winning the twenty-first century’s version of the class struggle.
The Obama administration’s handling of the bank bailouts has been heavily influenced by this power struggle. At the heart of the debate over whether the government should temporarily nationalize some of the big banks is the question of whether these banks are solvent. If the banks are solvent--if their assets exceed their liabilities--then the administration can continue propping them up until they fully recover. But if they are insolvent, it has to take them over. Figuring this out is, however, not simply a matter of applying time-tested formulas; what tests are conducted, and how the tests are conducted, are determined by political power.
The Obama administration proposed subjecting the leading banks to “stress tests” that measure how they would fare in a worst-case scenario for the economy. The banks, which want to avoid nationalization, have protested--and the their protests appear to have been heard. In designing the stress tests, the administration defined in February a “baseline” and a “more adverse” scenario for unemployment, housing prices, and GDP growth. But it is turning out that the actual situation is worse than what the administration described as the “baseline,” let alone the “more adverse” or worst-case scenario. Many economists, including Nouriel Roubini and Standard and Poor’s, are projecting even higher baseline and worst-case figures for 2010. Unsurprisingly, administration officials are leaking word that none of the banks will fail.
How much the banks actually influenced the specifics is not clear, since these kind of discussions take place away from the public and the press. But there is no mystery about the banks’ influence on how the Federal Accounting Standards Board (FASB) evaluated assets and liabilities. The American Bankers Association, along with individual banks, successfully lobbied Congress and the FASB to alter its “mark-to-market” rules to allow banks to estimate the value of their assets not on what they would bring in the present market, but on what they might bring in a recovery. And they succeeded. At least one part of one part of the administration does seem ready to fight back if the banks disguise their potential losses in order to qualify for TARP funds: In an interview with the Financial Times, TARP's inspector general Neil Barofsky said he was on the lookout for banks that “cooked” their books “to try to get money.”
Of course, it could be that the banks are in pretty good shape. And, even if they are in trouble, nationalization may be altogether the wrong policy for the Obama administration to adopt, possibly precipitating widespread bank failures. But the determination of what policy to adopt has become hopelessly compromised by the banks’ attempt to predetermine the outcome of the debate--becoming a question of power, not of policy.
Banks have also been trying to exert their power in the debate over executive compensation. In February, Congress, in response to intense public pressure, voted to limit the salaries of top executives from firms that receive government bailouts. Salaries were limited to $500,000 a year, and bonuses were to be restricted to a third of total income--provoking an outcry from the bankers and their lobby, the Financial Services Roundtable. Some banks are even trying to repay their bailout loans--and complaining vociferously about the repayment terms--in order to avoid the limits on executive salaries.
The Obama administration has since worked out a mechanism by which the banks could receive bailout money indirectly without being subject to the pay restrictions. Treasury Secretary Tim Geithner has denied the loophole, but other officials have contradicted him. It’s not clear exactly what is going on, but it seems very possible that the bankers have again forced the government to back down.
The banks are also playing a power game in the administration’s auto recovery plan. The administration has given Chrysler until May 1 to make a deal with Fiat that would allow it to avoid bankruptcy. As a condition of that deal, Chrysler has to obtain concessions from unions, Fiat, and its bank lenders. It has been successful with the first two, but the banks to which Chrysler owes over $6.8 billion are refusing to exchange their debt for common stock. These banks, which include among them JPMorgan Chase & Co., Goldman Sachs, Citigroup Inc. and Morgan Stanley, are the same banks that received $700 billion directly in taxpayer bailout funds in the last six months and many billions more indirectly from government-funded payments to them from AIG. Yet the Obama administration has had no luck in trying to pressure the banks to agree to a deal that it believes could save hundreds of thousands of jobs.
President Obama himself has described his role as mediating between the bankers and angry masses. “Be careful how you make those statements, gentlemen,” Obama said in his statement to bankers who were complaining vociferously about the restrictions on CEO salaries and bonuses. “The public isn’t buying that. My administration is the only thing between you and the pitchforks.”
That’s a great sound bite, but it suggests that Obama sees the administration’s proper role as acceding selectively to pressure from either the people or the banks. That’s not the way the administration should be conducting itself. A president is supposed to represent the people and banks, and to choose policies based on what is best for the nation.
Obama has also made the case repeatedly for transparency in government. And there is probably no place where it is more needed than in the relations between the administration and the banking community. How else can the public, including many of the bankers who are not a party to high-level negotiations, judge whether the administration is doing the right thing?
Yet, in its dealings with the banks, the Obama administration has been anything but transparent. Administration officials have made contradictory statements on whether it is trying to help bankers evade the limits on CEO pay. It has allowed puzzling leaks about the results of the stress tests, while refusing to reveal any specific results. It is also muddying the debate by relying on misleading euphemisms, like rebranding “toxic assets” as “legacy assets.” By further obscuring what is already opaque, the administration has made it even less likely that public--a larger constituency, certainly, than the banks--will be able to get beyond the sheer politics of the debate and come to a decision on what is the correct policy.
John B. Judis is a senior editor at The New Republic and a visiting scholar at the Carnegie Endowment for International Peace.