The Obama Economic Team’s Flawed Cosmology: Still Believing the Universe Revolves Around the Banks
Arianna Huffington | Posted April 6, 2009 | 10:10 PM (EST)
A series of recent meetings with members of Barack Obama’s economic team (including running into Larry Summers on my way to an appointment in the West Wing, leading to a spirited back-and-forth that made me feel like I was back at Cambridge, debating the smartest kid in the class), left me with a pair of indelible impressions:
1) These are all good people, many of them brilliant, working incredibly hard with the best of intentions to solve the country’s financial crisis.
2) They are operating on the basis of an outdated cosmology that places banks at the center of the economic universe.
Talking about our financial crisis with them is like beaming back to the 2nd century and discussing astronomy with Ptolemy. Just as Ptolemy was convinced we live in a geocentric universe — and made the math work to “prove” his flawed theories — Obama’s senior economic team is convinced we live in a bank-centric universe, and keeps offering its versions of “epicycles” and “eccentric circles” to rationalize their approach to the bailout. And because, like Ptolemy, they are really smart, they are really good at rationalizing.
It’s easy to get lost debating the complexity of each new iteration of each new bailout, but the devil here is not in the details — but in the obsolete cosmology.
If you believe the universe is revolving around the earth — when, in fact, it isn’t — all the good intentions in the world, and all the endless nights spent coming up with plans like Tim Geithner’s Public-Private Investment Program will be for naught.
The successive bailout plans have been frustrating to many observers (yours truly included), but when you realize how fully the economic team is mired in a bank-centric universe, all the moves suddenly make perfect sense.
Here is one example. Everybody agrees on the paramount importance of freeing up credit for individuals and businesses. In a bank-centric universe, the solution was a bailout plan giving hundreds of billions to banks. It failed because, instead of using the money to make loans, the banks “are keeping it in the bank because their balance sheets had gotten so bad,” as the president himself acknowledged on Jay Leno. As a result, the administration, again according to the president, had to “set up a securitized market for student loans and auto loans outside of the banking system” in order to “get credit flowing again.”
But think of all the time we wasted while the first scheme predictably failed. And how much better off we’d now be if we had provided credit directly through credit unions or small healthy community banks or, as happened during the Depression, through a new entity like the Reconstruction Finance Corporation.
Luckily, there is a plethora of economic Galileos out there who recognize that the old bank-centric cosmology is just plain wrong. But while Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc. are not being imprisoned for life for their heretical views — they are also not being listened to. Which is really surprising for an administration that has prided itself on a “team of rivals” approach.
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