Obama, the Light Touch?

Edmund L. Andrews and David E. Sanger have an article in The New York Times today that is sure to infuriate some people, including me. Here’s one excerpt:

“Far from eagerly micromanaging the companies the government owns, Mr. Obama and his economic team have often labored mightily to avoid exercising control even when government money was the only thing keeping some companies afloat.

“A few weeks ago, there were anguished grimaces inside the Treasury Department as the new chief executive of A.I.G., Robert H. Benmosche, whose roughly $9 million pay package is 22 times greater than Mr. Obama’s, ridiculed officials in Washington — his majority shareholders — as ‘crazies.’

“Causing even more unease to policymakers, Mr. Benmosche insisted that A.I.G. — one of the worst offenders in the risk-taking that sent the nation over the edge last year — would not rush to sell its businesses at fire-sale prices, despite pressure from Fed and Treasury officials, who are desperate to have the insurer repay its $180 billion government bailout.

“But in the end, according to one senior official, ‘no one called him and told him to shut up,’ and no one has pulled rank and told him to sell assets as soon as possible to repay the loans.

“A similar hands-off decision was made about the auto companies. Shortly after General Motors and Chrysler emerged from bankruptcy, some members of the administration’s auto task force argued that the group should not go out of business until it was confident that a new management team in Detroit had a handle on what needed to be done.

“But Mr. Summers strongly rejected that approach, and the Treasury secretary, Timothy F. Geithner, agreed.

“‘The argument was that if the president said he wasn’t elected to run G.M., then we couldn’t hire a new board and then try to run any aspect of it,’ one participant in the discussions said. The auto task force took off for summer vacation in July, and it never returned.”

The political argument for this position makes sense. Basically, Obama and his administration are afraid of being charged with “socialism” or “big government,” so they are doing what they can to defuse this charge. (Not that that will help given the way political rhetoric is thrown around these days.)

I’m not sure the policy argument makes as much sense. Think about GM, for example. The Treasury Department owns 60% of GM. In the private sector, if you were a private equity fund manager who owned 60% of a deeply troubled company, and you didn’t play an active role in its reconstruction, your investors would accuse you of being negligent. In a turnaround situation, the majority investor is supposed to be actively involved, especially when he’s doing it with other people’s money, since he has a fiduciary obligation to those other people. Yet the administration is going out of its way to not be involved in GM. This is from the June 1 fact sheet:

As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.”

The phrase “common shareholder” is probably intended to emphasize the fact that the government is a shareholder, not the board or management, but it conveniently overlooks the fact that the government owns 60% of the common shares – which most majority owners usually use to install a majority of the board of directors.

Leaving political arguments aside, what are the possible justifications for this policy? One is that an active government presence will scare away new private investors. I think we can safely dismiss that fear in the case of GM, at least for the next year or so, since those new private investors do not exist.

Another possible justification is that government involvement will become a channel for political influence from Congress. But this was not true, for example, of the administration’s automotive task force, which operated independently of Congress.

The other possible justification is that the government is somehow incompetent in a way that a private equity investor – say, Cerberus, the previous owner of Chrysler – is not. I know there are many people who think this is the case. But first of all, even if you are the Treasury Secretary and you happen to think that the people who work for you are incompetent, there are still other solutions; for example, you could hire KKR to be the trustee for your 60% stake in GM and act on your behalf, rather than just turning your back on your multi-billion-dollar investment of taxpayer money. (I’m not recommending this, just pointing it out as an option.)

And more importantly, why is President Obama – the man who, last Wednesday night, said, “[Our predecessors] also understood that the danger of too much government is matched by the perils of too little; that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, and the vulnerable can be exploited” – subscribing to the anti-government caricature of right-wing talk radio? Does he really think that the federal government, and the dozens of talented people he hired and appointed, is too incompetent to do what any twenty-something Ivy League graduate with the connections necessary to raise a $100 million fund can do?

By James Kwak

57 thoughts on “Obama, the Light Touch?

  1. Does he really think that the federal government, and the dozens of talented people he hired and appointed, is too incompetent to do what any twenty-something Ivy League graduate with the connections necessary to raise a $100 million fund can do?

    YES – and he has no other choice.

    So does everyone else who supposedly leads this country. There is a long-standing, and politically necessary, sham belief in the ineffectuality of government. If, in fact, government could do things well, there would be less need for private enterprise. Then the peasants would question the unbirdled free market capitolism which oppresses them. Then we might have real reform. That threatens too many people’s personal wealth.

    Need I say more?

  2. Actually, the government is chock full of competent people who have their competence stifled for political reasons on a daily basis.

    It’s funny though how people still assume the government (at its highest levels) even thinks about acting in good faith in the interest of the people it is supposed to represent. It’s as if no amount of evidence to the contrary will ever convince them otherwise.

  3. This is a very interesting and timely topic to explore since the Dick Armey protestors are basically claiming publicly that the government is trying to put AIG and GM out of business so they can run the companies for the benefit of the “socialists” that got elected last Nov. I think AIG should be cleaned out and their executives sent to GITMO. GM, on the other hand, was leveraging their business over many years and published these activities in quarterly SEC filings. The UAW assisted them in this procedure. The two corporate cultures and failures are quite different in scope and the level of deceit.

  4. Yes, strange that a man with virtually no experience in executive management or a deep understanding of private sector economics would appear not to know what he is doing. That certainly is odd. Who woulda thunk it?

  5. yep that’s what it has come to for all who are in public office
    why anybody still aspires to it eludes me

    but accepting a public office even down at the level of the country women club (Landfrauenverein) is setting yourself up as an object for slander and still people are willing to endure it

    that said I can’t remember that the technique of letting them sort it out themselves while I monitor has ever worked – it needs to be distinguished from a team of equals which may get things done quite efficiently – but as long as a powerful but not-leading figure is there somewhere things tend to stall – nevertheless the technique was taught at least until 2003 extensively as the truly modern way of leading

  6. Why is there continuing incredulity about Obama, his his advisors and the direction of this administration? There’s been disbelief about every campaign lie, every policy sell-out – and there have been too many to count – yet well intentioned people just can’t grasp the fact that, like every one else in Washington, the man is just the most monstrous whore. Perhaps this naivete is born of a kind of separation anxiety, a suppressed fear that the United States has, in fact, degenerated into dictatorship and a refusal to accept it. To be sure, its a two-headed dictatorship giving off the illusion that one of its elements is actually an opposition when, in truth, it is simply a blackhole into which public outrage is funnelled. In this way one grasps best the brownshirt anger over health care and spending. Not for a minute is this outrage aimed at the system but merely at one of its components. The only authentic anti-system discontent today exists on the left and it is weak and poorly organized.

  7. “Another possible justification is that government involvement will become a channel for political influence from Congress. But this was not true, for example, of the administration’s automotive task force, which operated independently of Congress.”

    Maybe. I agree with most of your points but I think you underestimate the Congressional and other forces that can influence decision making. Witness the trade sanctions on China on tires. This is not to say that it shouldn’t take the risk of this interference.

  8. It is a shame that public money is being used to prop up dinosaur companies. Why are we propping up the incompetent and weak. What if instead of giving multi billion in loans, bailouts and implicit debt guarantees we extended the equivilant amount of money in low or no interest loans and grants to ALL BUSINESSES and they were distributed on merit. Granted I know “merit” is in the eye of the beholder, but those details can be taken care of.

    Example: in Canada, where I live there were not huge bailouts to the same level as in the US, but we did throw billions at GM and Chrysler to keep making their zombiemobiles in southwest ontario. The argument was this would either create or retain jobs, which was such a fallacy it hurt. Even during the boom, those factories had been shedding workings, so I fail to see how bailing them out in a crisis will be anything more then a bandaid on a laceration. Secondly, this is poor policy. Put yourself in the position of say a small manufacturer like ZEN auto, a small innovative company attempting to take market share away from the large companies. The government has essentially said to you, no matter how innovative your products, or incompotent your competition, we will continue to raise the barriers to entry for you to compete. This is market place distortion, and the type of corporate socialism I hate. Why would anyone invest money in that industry if they knew these were the rules they would operate under. We need to let the mammals companies (small, adaptable) eat the dinosaurs (old, entrenched, more concerned with rent seeking then actual innovation).

  9. First off, the Zen auto idea is totally unrealistic. Manufacturing investment is a huge barrier to entry in the auto industry. What is a small innovative company going to use for a supply base?

    You might find bailing out GM and Chrysler to be personally distasteful, but we damned well better have heavy manufacturing capability on this continent, if for no other reason then for defense machinery, when it comes to that.

    Re: Cerberus – it would be hard to find greater incompetence that what was shown by that bunch of fools. (Car companies only prosper when they’re run by car guys – the entire history of the industry has shown that repeatedly. Consider Chrysler under Lynn Townsend and under Iaccoca.) So who did the 3-headed doggie put in charge of Chrysler? The idiot that ruined the hardware store. He and his cronies did untold damage to a company already weakened by a decade od enslavement to Daimler. Chrysler was a great company ion 1997, but then got eaten alive by parasites.

  10. @eric: oh come on, let’s keep this civil. This isn’t just Obama, and blaming his lack of experience solely for this is partisan bickering. Geitner and other economic advisors hold just as much responsibilty for this, and is more important to the underlying issues.

  11. For those who find the President incompetent: what did you expect? His expertise was community organizing. Which means what? Mobilizing the dissatisfaction of the excluded to make a name for himself. We might as well have had Jesse Jackson, Al Sharpton or Glen Beck. Read today’s speech to Wall Street. He sounds like Simon Johnson. But his plan is what, exactly? He has no plan, except to avoid trampling powerful toes. He preaches consensus. The consensus of the past thirty years has been trickle down. Give the rich enough money and everyone will be better off. Well, we’re still trying that. The next step will be making the rich as poor as the poor. I can hardly wait for Barney Frank and Chris Dodd and Nancy Pelosi and Harry Reid to regulate the banks. They have quite a track record. The only real question is whether or not we’re going to have a Depression. On that one the jury is still out.

  12. Wait a minute here. They did hire a twenty something (almost) graduate of an Ivy League school to run GM. His name is Brian Deese and he is actually 31 and he dropped out of law school to raise money. His title is Special Assistant to the President for Economic Policy. Poor Brian has absolutely no credentials to run any company, let alone GM. A choice between Brian and GM old timers is a choice made in hell.

    For more details, read our new book, The Great Recession Conspiracy. You can find it at scrbd.com/doc/16864582/The-Great-Recession-Conspiracy, ($4.95), and it is available as a Kindle book.

  13. I certainly do not want to defend Daimler Mercedes but over here there was a lot of head wagging because nobody could understand what Daimler saw in a company that everybody else claimed wasn’t up to date.

  14. “(Not that that will help given the way political rhetoric is thrown around these days.)”

    The sad fact is that Obama “owns” AIG and GM. His opposition is not giving any praise for the lack of socialism. OTOH, they will freely cast blame for anything that goes wrong. You can see this already in the cries that the stimulus has failed — from those who opposed it in the first place, and who tried to make it too small to succeed. Since things always go wrong, and critics will harp on things that can be made to appear to go wrong, criticism is inevitable.

  15. By now the evidence is overwhelming that Obama is a corporatist just like Bush, but utterly lacks Bush’s brazen flair about it, because even with the likes of Summers and Emanuel there to guide him he really doesn’t know how to run a looting operation, nor how to be the politically plausible face of it.

    So even as he carries out a right-wing policy he’s subject all the way to Republican condemnation and ridicule. Why not? It’s win-win for them. They get a corporate-friendly agenda. Obama’s policy infuruates, demoralizes, and drives away his base, while leaving everyone else rightly considering him incompetent (though perhaps not for the reason they think).

    If you doubt this, you have to explain why he refuses to learn that he gains NOTHING politically from not “being a socialist” like they clobber him for. If you’re going to be punished anyway, you might as well commit the crime for real, if it’s what you wanted to do.

    So is he just completely stupid and incompetent on that point? He’d have to literally have some kind of mental illness.

    No, nothing supports the evidence other than the incompetent-corporatist theory.

    Obama is Brownie, but on a vastly larger scale.

  16. “There is a long-standing, and politically necessary, sham belief in the ineffectuality of government. If, in fact, government could do things well, there would be less need for private enterprise.”

    The belief (real or shammed) of politicians about the efficacy of government is a self-fulfilling prophecy. Contrast two Republican Presidents, Eisenhower and Bush II. Bush II believed that that government is best that cannot govern, and bankrupted the country trying to prove that proposition. Eisenhower, the former Supreme Allied Commander, knew how to get things done, and did.

  17. The fact that the Government owns 60% of GM is not the same as a Private Equity firm owning 60% of a company. Paulson et.al simply exercised its unlimited power. A Private Equity Firm at least has to persuade the people whose money is at risk before it buys anything. Just because the Government owns 60% of anything does not make it an expert or even plausibly competent. Why should a government bureaucrat have business competence?

    That GM or AIG apparently did not have enough competence either is beside the point as well. Isn’t the point to have GM and AIG eventually independent again? I think this could have happened without the Government’s initial involvement through bankruptcy–as may be the case in any event.

    If the Government is so good at this stuff, why not keep it all?

  18. Exactly, manufacturing investment is a huge barrier to entry, but that doesn’t mean that adding more barriers to entry is a good thing, by doing so the government has made the barriers to entry higher. Also, their are high fixed costs in many aspects of the computing/software/it industries because of economies of scale and such, but that did not stop Google from eating MS lunch.

    Also, imagine if those firms had gone bankrupt, many of the smaller firms, armed with loans could have bought up those assets (factories, heavy machinery) at pennies on the dollar. Just like when a large animal dies on the savannah, the smaller ones come along and eventually, its nutrients replenish the ecosystem from which it came. And regarding car companies, TATA and ZEN have fairly comparable business models, and TATA rose to now own Jaguar and beginning to make its first forays into North America. A little creative destruction is all I am asking for, but collusion between lobbyist, unions, government and business combined with fear of the future prevent it. What if we kept raising barriers ot entry in the computer industry for fear of the layoffs in typewriter plants?

    Good point of the private equity. Also, why do private equity barons pay a lower tax rate as a percent of total income then their maids. Something wrong with that.

  19. The G.M. execs might have had something to do with it too. Why did the Japanese dominate the car market for years? Do we really expect the President to be a corporate turn-around expert with 50 years of experience?

    You might also ask yourself why the government feels compelled to buy up companies to begin with using your money. Is capitalism so fragile that it can’t withstand even a few business failures? Are GM cars really the transportation of the future?

  20. It says on his Wikipedia page that he also ran the economic parts of Obama’s presidential campaign.

    Hint to young people: work for a presidential campaign. If you win, you might get to run a fortune 500 company, no experience necessary.

  21. Mike, you would be amazed at the amount of business competence already in government that could be tapped.

  22. Obama’s letting Summers/Geithner (i.e. the same Goldman Sachs crowd that includes Paulson) run his economic policy. So his economic policy is the same as Bush though with a more “liberal” sheen to it. If he thinks he can win relection by dissing the very Left that got him elected (Who will remain to vote for him besides the blacks?), well that could be stupid.

  23. I figure since Cerberus picked up Chrysler to flip it and the government knows how to flip Treasuries – there’s more intersection of competencies than we might at first assume.

  24. Remember, these guys in the Administration are basically gofers between the money guys in finance and our illustrious politicians.

    “Running” these companies basically means making sure that you keep those folks in the loop.

    However, given what our brilliant, quantitative, all the-resources-in-the-world economic hard-headed financial “leaders” did for our economy – maybe having Elmer Fudd operate these companies isn’t such a bad idea.

  25. I don’t know, picturing the Obama administration trying to play an active role in running a major corporation is pretty amusing. The administration would probably leak business decisions so they could be vetted by the blogosphere.

    Of course, Benmosche thinks he can run AIG from his vineyard in Croatia, because he did not want to miss his first zinfandel harvest.


    What grand alternatives taxpayers have.

  26. This is what William K Black says about clearing up the banks, just what he did with the S+L fraudulous banks. All you need is 20 succesful bankers with integrity even for the biggest of banks.

    And those who says this is nationalization, or worse socialism, Reagan did receiverships and he wasn’t called a socialist, was he?

    More on how the clean a dirty bank:

  27. Good stuff!

    I’m done with the hand-wringing. No more wondering who to bring in to run things if we throw all the bums out. The Canadians! Dear Canada, we’ve long admired your smooth highways, pristine forests, fierce hockey players, and Nova Scotia beer. Please annex the United States quickly and quietly. It can’t happen too soon — the world will instantly love us with our Hudson Bay blankets and Farley Mowatt and maple syrup. I guess this has been your plan all along, else how do we explain Celine Dion and Howie Mandel?

  28. Obama’s “light touch” with just about everything is a grave disappointment, although as my wife points out, we only imagined he was going to do everything right. I see a man who basically is unable to take a strong, principled stand that is at variance with “conventional wisdom” and use his bully pulpit to really make changes. He actually seems timid in the face of right-wing, loony opposition. He’s certainly no FDR and the things he’s doing, including this “light touch” with the financial institutions, will result in little change beyond window dressing. FDR did radical things and said with relish that he “welcomed” the hatred of his opponents. Obama scurries around trying to win their cooperation. We’ll end up with no real change in the way we regulate financial institutions and even greater dangers to our economy, with no real reform of our bloated and ineffective medical-industrial complex, with no real effort to change course in our disastrous foreign and war policy, etc. He was a terrific candidate and can still make a stirring speech, but does not seem able to do any real heavy lifting.

  29. Obama is a corporate shill, a black face on the throne of empire. Those expecting “big ideas” from this Ivy League indoctrinated technocrat are sure to be deeply disappointed.

  30. I’m sorry James, I don’t see a story here. President Obama was in a no win situation. Imagine if he had chosen someone to control those voting rights the can of worms that would open up. He made the right call. Let the old basturds run their own company into the ground.

    Ross Perot tried to save General Motors years and years ago, even before he ran for President. He was told not to ruffle the sheets of the slumber party and get the F— out of Detroit.

    Other than the Chevrolet Malibu (and I have my doubts there) what does GM make now that isn’t a heap of trash to collect mechanic bills on and crunch up after 10 horrid years??


  32. This is the irony of Obama. He campaigned on “Change” and delivered a relatively seamless continuation of prior policy: Iraq (McCain would have done the same, regardless of rhetoric), Afghanistan, stimulus, and bailout. He has chosen to attack the health care problem, which maybe wouldn’t have happened, but the way that he is going about it seems guaranteed to tinker, not to fundamentally change anything. Those of us who were naive enough to believe the word “change” (though cynical, I confess I hoped for more) have been disillusioned. Sad, really.

  33. Doesn’t anyone realize that by rescuing a private entity that is too big to fail, the government is working in the social interest – be that society in general or the society of shareholders. There is little to debate – the United States is socialist.

    There is no greater irony than shareholders asking for and receiving money from society as a result of their own risky decision-making in the name of rescuing society.

  34. “This isn’t just Obama”.

    No, he’s just the President of the United States. “the most powerful man in the world”. Our great hope! The change we believe in!

    Or something like that.

    in general, just think about how traveling entertainment used to work. a talented guy who knew his lines would be up there on the stage in the darkened tent, doing his act. the rubes be sittin down in the low seats. and the operators be stalkin through there takin the wallets offen the rubes. we got the operators up on Wall Street, we got the stage performer down in D.C. … close enough.

  35. A brief review of the actual concerns motivating our Founding Fathers should make clear to a mature reader that our present government has not ever, since its establishment, had “the interest of the people it is _supposed_ to represent” as a core motive. However, our government always has been for and by the people whom it truly represents.

  36. I prefer to think of him as the whiteface minstrel man who prances and speechifies while his white massahs loot the yokel audience.

  37. This:

    There is a long-standing, and politically necessary, sham belief in the ineffectuality of government.–Philip H

    And this:

    A brief review of the actual concerns motivating our Founding Fathers should make clear to a mature reader that our present government has not ever, since its establishment, had “the interest of the people it is _supposed_ to represent” as a core motive. However, our government always has been for and by the people whom it truly represents.–law student

    And (provided that the phrase “two-headed dictatorship” is intended to colorfully describe the way the two parties flock to work with corporations–the most authoritarian institutions we have in this country–rather than a literal, iron-fisted dictatorship) this:

    [the government] is simply a blackhole into which public outrage is funnelled. In this way one grasps best the brownshirt anger over health care and spending. Not for a minute is this outrage aimed at the system but merely at one of its components. The only authentic anti-system discontent today exists on the left and it is weak and poorly organized.–Lavrenti Beria

    I think this makes up the crux of the problem. The question is, is it possible to get ourselves out of this mess–and to keep from descending back into something similar or worse each time a bubble bursts? Or are businesses so entrenched, the profit seekers so amoral, and the population so thoroughly indoctrinated against the state (including the segment of the population running the state) that there’s nothing that can be done?

  38. That’s what he’s trying to do, but:

    1. This kind of sheen is problematic in itself. It’s alot easier to keep selling out the people and conveying the loot when your rhetoric is all about “free markets” and “entrepreneuers” than when in theory you have to stick up for the disadvantaged.

    2. Therefore a “liberal” corporatist has to overcome a greater dissonance between rhetoric and action than does a Republican. Therefore he must be a very skilled politician. Clinton was good at it. Obama doesn’t seem to be up to the challenge.

    3. Both of these are exacerbated in crisis times. Bush could bolster his corporatism with his war-on-terror diversion tactic and with demonizing any dissenter including on economic policy as an unpatriotic traitor who wants more 9/11s etc.

    That kind of rightist jingoism is not as readily accessible to the corporatist-in-liberal-clothing like Obama. (Though with tons of help from the MSM he has tried to set up moral equivalences between birthers and nazis on the one hand and public option supporters on the other.)

    The most important crisis point is that Clinton had the luxury of conducting all his looting during boom times (though I’ve been hearing the argument that NAFTA doesn’t get enough credit for the 1994 electoral debacle, that commentators overemphasize the failure of Hillarycare). People weren’t as vigilant. Today the people are furious, and the more intelligent among them are hypervigilant and are doing all they can to raise every alarm. So that only radically increases the level of political skill Obama would need to deploy.

    (Does Summers understand the difference between the political challenges facing these two admins he’s been part of? As we know, he’s always been bad at public politics.)

    Obama just doesn’t seem to be that competent at all this. Everyone who’s paying attention is saying with sarcasm and bitterness, “Heckuva job.”

  39. Twenty sucessful bankers WITH integrity. Aye there’s the rub. Good luck finding that. That’s like finding an honest lawyer.

    No, till we get back to the idea that wealth only comes from productivity, not from shifting money from one pocket to the other or marketeering gamesmanship, nothing will get fixed.

  40. I completely agree with what James has to say. The Obama administration has been very sensitive and probably even considerate enough not to become an intereference.

    I do understand that the administration has come under fire from both sides of the argument but I believe they’re doing the best they can coz the results show!

  41. Dear Ted K

    Did you bother to read the “cheap” book before you started yelling? If $4.95 is beyond your budget, sent me your email address and I will send you a complimentary copy. Then we will welcome your critique.

  42. I fully agree on productivity and consuming through real economy with added value. However first the bank shit has to be cleaned, one way or another. It’s unfortunate that a guy like Bill Black is not called in, like with the S+L banksters, to clean of Wall Cheat. Obama is just a talking head.

  43. you misread the intent of the article

    the article is not meant to be an objective view of economic matters

    the factoids listed were listed to help advance the premise of the article : “we are in danger of big government”

    this is an emerging news theme

    editors are testing “big government ” as a story line

  44. The problem probably does not lie with the Republicans and what they will say. That is predictable and administration knows it, what it will be, and that they cannot avoid their talking points.

    The problem is what the corporate media will roll out as its talking points.

    The Obama administration is almost certainly correct in in taking this as a delicate political task. They are carefully crafting the Republican intransigence into a story that the corporate media can hardly avoid (although mostly they still do). I wish them good luck.


  45. It’s the eternal struggle of the democratic majority and their president, against a vocal and impotent minority. I wish them good luck too…they’ll need it!

  46. Dear Ted K

    My offer still stands. Send me your email address and I will send you a complimentary copy of our book. It usually is appropriate to know what you are talking about before you start yelling. Read the book and feel free to give us your comments, good, bad, indifferent.

  47. If damned either way, he might as well attempt to assert some managerial control over the entities that have received (in the aggregate) something like a trillion dollars in taxpayer largesse.

    It’s no longer a political calculation — it’s called governance. “Just do it,” says the slogan. But I never expected much from this guy in any case, and only voted for him because I was so scared of Sarah Palin.

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