Today, some Republicans and one irascible former CEO are accusing the Obama administration of manipulating the job report to make the administration look good. There is a long history of controversy regarding efforts by administrations to influence events so as to enhance their electoral prospects. This is a form of home-field advantage that goes with incumbency, but it doesn’t always work.
In 1972, then-Federal Reserve Chairman Arthur Burns was accused of goosing up the money supply to foster the re-election of President Richard Nixon. Nixon won by a landslide, but was then tripped up by Watergate, as Democrats took full advantage of their control of Congress to impeach and remove him from office.
In 1979, the Carter administration was forced to endure a decisive intervention by then-Fed Chairman Paul Volcker to put the brakes on a spike in interest rates and inflation that had already damaged the administration politically. And Carter was defeated in 1980 after a campaign in which the Ronald Reagan camp lived in fear that the Carter camp would pull off an “October surprise” to regain control over events. The first Reagan administration took the gamble of allowing Volcker to finish his work, calculating or hoping that the ensuing recession would be out of the way by the time Reagan ran for re-election in 1984.
By 1988, George H.W. Bush was running for “Reagan’s third term,” and the savings and loan (S&L) industry was on the verge of collapse. The now-defunct Federal Home Loan Bank Board put in place a series of costly transactions to restructure troubled S&Ls, which became known as the “1988 deals,” while the Treasury acquiesced. The industry ultimately did collapse, and a member of the Bush family was even implicated in one of the failures, but this did not occur until the election was over. George H.W. Bush was then defeated for re-election in 1992, due largely to a prolonged recession, and he is said to blame then-Fed Chairman Alan Greenspan for not taking timely action to boost the economy.
During President Bill Clinton’s years in office, the administration cultivated the reputation for taking its cue from Wall Street in the persona of Robert Rubin, a former CEO of Goldman Sachs who first worked at the White House and then took over the Treasury. While at the White House, he wrote a notorious letter assuring clients that he would still be looking out for them. Near the end of the Clinton administration, Rubin led the effort to push through the Gramm-Leach-Bliley Act of 1999, which ratified the deal Travelers Group had already made to merge with Citigroup, whereby it would breach the Glass-Steagall Act prohibition on the mixing of banking and commerce by bank holding companies. Then, immediately after the signing ceremony, Rubin left to take a position in the executive suite of Citi. When the ethics of this move were challenged, Rubin responded that he was taking a “belt and suspenders” approach to the issue by taking his counsel at Treasury with him to Citi. In retrospect, one can say that Citi’s business plan did not pan out, but it was well-positioned to benefit from the bailouts of 2008.
During 2007 to 2008, a series of market events occurred that are well-documented by the many books that continue to appear on almost a weekly basis. As the fall of 2008 approached, it was John McCain who was attempting to win what would have been the “third term” of George W. Bush. At that time, I made a prediction that was cynical in its intent, but turned out to have been wrong by virtue of having been overtaken by another cynical prediction. The incorrect prediction was that the administration would dust off the 1988 playbook and come up with a bunch of deals calculated to see that the banking industry would not collapse during the campaign.
Concurrently, another former Goldman Sachs CEO, Hank Paulson, had taken over as Treasury Secretary, and I said at the water cooler, “There’s a problem at Goldman, we don’t know what it is, but Hank Paulson is coming to Washington to manage it on Goldman’s behalf.”
As events unfolded that fall, it turned out that the administration had no coherent plan. As Bear Stearns was bailed out by a deal in which the government provided $29 billion for JPMorgan Chase to take it over, but Lehman Brothers was allowed to fail, it looked like the government was being led by the nose by JPMorgan Chase’s CEO Jamie Dimon, a democrat, and deals were being done or not done according to his agenda. Goldman Sachs and Morgan Stanley were hastily converted into bank holding companies to make them eligible for direct support from the Fed. As the 2008 episode came to a head, a bizarre scenario played out in which McCain “suspended” his campaign in order to appear to lead decisive action, whereas the challenger, now president, adopted a posture of serenity. In the event, McCain did not benefit from the “home-field advantage,” because the administration didn’t seem to know what it was doing.
Since coming to power, the Obama team has treated the 2008 crisis as conferring carte blanche to do anything and everything, with the unlimited support of the Fed, to bolster the housing industry and Wall Street. In response to any criticism, the president’s team repeats the theme that this was tough, but that they rescued the economy by taking decisive action, and they are not going to allow the economy to slip back into a recession or worse. One is reminded a bit of the Dana Carvey parody of the first President Bush, “Stay the course; full speed ahead.”
If one were looking for substance in the prospects for economic recovery, it might be found in the recent remarks of Larry Fink, head of BlackRock and one of those mentioned as a potential Treasury Secretary in a second Obama administration. In listing strong points of the economy, Fink mentioned the stock market and the housing industry, although critics might object that these are the same sectors that caused the crisis. However, the third point he offered is a new one. Fink said he had visited Germany and met with an industrialist who is closing a plant in Germany and moving it to the United States to take advantage of lower natural gas prices here. If this is indeed the beginning of a trend, perhaps there is some basis for the optimism of those who believe that the economy can emerge from the ditch due to fundamental improvement in the real economy, not just artificial stimulation of the financial sector.
Robert Feinberg served on the staff of the House Banking Committee for 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms, and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog, and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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