Barack Obama assumed an office today that no other president in the history of the U.S. has ever taken on at inauguration: the role of the banker in chief of the United States.
It’s a paradoxical role. Never before—even during the last Great Depression—has the government owned such large stakes in our key financial institutions. Yet perhaps no other president has found his choices on economic policy so constrained. Already Obama seems to have come to terms with several facts: the budget cannot be balanced, taxes cannot be raised, spending cannot be constrained, and interest rates cannot be raised or lowered. The economic fixes available to prior presidents won’t do the trick this time around.
This isn’t a job that Obama ever asked for, and it is certainly not one for which his career in politics has politics and community activism has prepared him. He’s never worked in finance or banking. He has no known education in finance. But perhaps these aren’t the debilitating handicaps they might seem. After all, it was the best, brightest and most experienced of our financial profession who helped destroy our once strong financial institutions. Maybe it’s not wrong to hope for change.
It seems likely that a huge part of Obama’s likely program will be an attempt to get banks to lend money at much higher rates. In these attempts, his power will be greatly enhanced by a policy he owes to the Bush administration—the embrace of government ownership of large stakes in financial institutions. What’s more, the continuing illness of those financial institutions means they will have to bend to the will of policy makers. For the foreseeable future, they remain dependent on government largesse for their survival.
On the other hand, the very fact that the banks remain on life-support will greatly attenuate Obama’s ability to direct their actions. One reason money has not been pouring into the broader economy from the banks is that the banks have huge capital deficits on their balance sheets. Shares of Bank of America are still headed toward zero because of its enormous leverage and the plummeting values of the assets it holds. It must hold onto the new government capital because that is all that is keeping it afloat. And Bank of America is hardly alone in this regard.
It seems likely that the early months—perhaps the first few years—of Obama’s administration will be coloured by attempts to untie this Gordian knot. One choice available would be a dramatic turn around in policy—a decision to let failed banks actually fail, to force them to write-down bad assets all the way, to restore the role of market processes and transparency in credit markets. To replace market fearing with market clearing, as a politician might put it. Unfortunately, we’re not sure Obama knows he even possesses the knife he needs to cut the knot. (But maybe if he reads Whitney Tilson’s essay here, he’ll start to understand what’s required.)
It’s a time for choosing for our Banker In Chief: to behave like the bankers of the past who have brought us so close to the precipice or embrace a banking of the future.