Wednesday, July 6, 2011

Did Obama's Failure to Stand Up to Wall Street Doom the Recovery?

Columnists occasionally suffer from a bias against the obvious. For writers with lots of space and an expectation to surprise their audience, there arises a natural prejudice against simple explanations.

It is simple to say that unemployment is high today because we suffered a catastrophic financial collapse. It is simple to say that Wall Street profits are high today because financial firms, having been bailed out by Washington, understand how to mint money in a global economy with ferocious foreign growth. It is less simple, and also quite surprising, to argue that 9 percent unemployment is the stepchild of Wall Street's enduring power.

Thus, this: "Obama's Original Sin" is the first column by Frank Rich for his new employer, the redoubtable New York magazine, four months since his left his plum gig on the New York Times Sunday op-ed page. In the sub-header of the article, or what journalists would call the dek, it's clear that Rich's gunpowder has spent the last 100 days generating kinetic heat, because the top-line accusation is explosive: "The president's failure to demand a reckoning from the moneyed interests who brought the economy down has cursed his first term, and could prevent a second."

Later Frank settles on a thesis: "[Obama's] failure to push back against the financial sector, sparing it any responsibility for the economy it tanked, empowered it to roll over his agenda with its own. He has come across as favoring the financial elite over the stranded middle class even if, in his heart of hearts, he does not. There are at least three reasons to question the idea that Obama's failure to rein in Wall Street, punish Wall Street, and fine Wall Street, is what's fundamentally hurting Main Street.

First, there is little evidence that money on Wall Street hurts job creation. In fact, there is every reason to believe that the correlation, whatever its strength, goes the opposite way. When banks have more money, they have more money to lend, and companies have more money to spend. Wall Street was fabulously profitable in the 2000s when unemployment was below 5%. Then financial firms saw profits plunge in 2008, and the economy went into a tailspin. Job losses accelerated into January 2009. By July that year, financial profits had stabilized and six months later, unemployment hit a plateau. The unjust reality of things is that when Wall Street falls, the economy falls; but when Wall Street picks itself up, the workforce doesn't necessarily follow. (read more)