The New New Deal

by Grunwald, Michael

  But it took just two days to bridge the gulf. The key moment came when Boehner offered to make the Bush rebates refundable if Pelosi dropped her spending demands. Pelosi agreed, as long as high earners wouldn’t be eligible for rebates and extremely low earners would. They soon worked out a simple deal to send checks of up to $1,200 to all low- and middle-income families, plus $300 per child. Boehner also won a tax break encouraging businesses to buy equipment. “It’s almost surreal to think how rational those negotiations were,” recalls Pelosi’s tax aide, Arshi Siddiqui. The House overwhelmingly approved the compromise, proving bipartisanship was still possible when both sides wanted a deal.

  Pelosi urged Majority Leader Reid to ram the House agreement through the Senate, to get the rebates into the mail fast. Bush had vowed to veto the spending items that Democrats wanted, and Pelosi worried that trying to resurrect them would just create gridlock. But senators, who tend to view themselves as distinguished solons, never like pressure from the House, which they tend to view as a sandbox for riffraff. Reid was one of the least pretentious senators, a former amateur boxer who grew up without running water in a small town, but he told the speaker to back off. She didn’t. When Senate Democrats plumped up the House bill with the spending add-ons she had failed to extract from Boehner, Pelosi’s staff secretly strategized with Senate Republicans to salvage the original deal. This mistrust among Hill Democrats would be another recurring theme. House Democrats joke that Republicans are just the opposition; the Senate is the enemy.

  Reid’s pumped-up stimulus received fifty-nine votes. But it needed sixty to overcome a Republican filibuster led by Minority Leader Mitch McConnell of Kentucky, yet another harbinger of events to come. Reid relented, and the Senate grudgingly passed the House bill virtually intact. On February 13, Pelosi, Boehner, Reid, and McConnell all stood behind Bush as he signed a $168 billion stimulus, the equivalent of the annual Air Force budget. Rebate checks would start going out in May.

  “You know, a lot of folks in America probably were saying it’s impossible for those of us in Washington to find common ground,” Bush said. He then demonstrated why, interrupting the pre–Valentine’s Day lovefest with a swipe at Democrats who had tried to “load up this bill with unrelated programs or unnecessary spending.”

  Bush’s main message was that this “rough patch” would soon pass: “So long as we pursue pro-growth policies, our economy will prosper, and it will continue to be the marvel of the world.”

  “Uglier and Uglier”

  The rest of 2008 made that rough patch look like a golden era, as the cancer in the U.S. housing market metastasized throughout the global financial system.78

  The real estate bust had dire implications for trillions of dollars’ worth of mortgage-backed securities, which had been sliced, diced, and used as collateral in the overnight lending markets that corporations depended on for ready cash. Now nobody knew what all that paper was worth, which triggered a run on the investment bank Bear Stearns in March. In 1929, a bank run had required an actual run to a bank, but now billions of dollars could be withdrawn with a keystroke. And global finance was so intertwined that the fall of one overleveraged behemoth could drag down the entire system; Bear Stearns had open trades and derivatives contracts with thousands of other firms. So Fed chairman Ben Bernanke, a former Princeton professor and Depression scholar, and Tim Geithner, a former Clinton Treasury official who led the New York Fed, helped J. P. Morgan Chase take over Bear Stearns and stand behind its trades, the first in a series of unprecedented interventions that upended the staid world of central banking.79

  Meanwhile, millions of homeowners were discovering that their primary asset was suddenly a liability. And their disposable income was being swept away by stratospheric gas prices, which topped $4 a gallon for the first time ever that summer. The turmoil on Wall Street was not yet ravaging Main Street—fortunately, Bush had failed to divert Social Security funds into the market—but retirement accounts were starting to take hits, and unemployment was starting to climb.

  By the time Obama clinched the Democratic nomination, it was obvious the economy would be the dominant issue in the fall.80 It was not obvious this would help Obama. Even though he was running against the Bush economy and its effect on working people, many Democrats fretted about his appeal to blue-collar whites, the “beer-track” voters who preferred Clinton in the primaries. Maybe they’d gravitate toward a war hero like McCain in the general election. Even if you ignored race, Obama seemed more wine-track, an Ivy Leaguer who whined about the price of arugula at Whole Foods, a law professor caught on tape condescending to “bitter” small-town Americans who “cling” to guns and religion in hard times. It was no accident that when Biden was announced as Obama’s running mate, the emphasis was less on his Washington experience or foreign policy chops than his middle-class roots, average-Joe sensibility, and daily commute on Amtrak.

  But Obama’s team welcomed a debate on the economy with McCain, who didn’t seem to know how many houses he owned, and was basically running on the Bush agenda. McCain’s campaign cochairman, former Texas senator Phil Gramm, declared America was merely in a “mental recession” ginned up by “a nation of whiners,” and though he vanished from public view—McCain suggested he’d make a good ambassador to Belarus—his complaint that the media were overhyping bad economic news reflected the campaign’s thinking. “It was my job to watch the data, and I kept telling the other economists advising McCain that things were unraveling,” Moody’s Mark Zandi recalls. “They just didn’t buy it.” In his stump speeches, McCain kept repeating the Bush line that “the fundamentals of the economy are strong.”

  Obama knew that was nuts. His economic team—now led by Jason Furman from the Hamilton Project—was telling him the fundamentals of the economy were dreck. Obama was holding regular calls with Rubin, Summers, and other Democratic heavyweights; he was talking to Paulson and Bernanke as well. No one had anything rosy to say. “We could all see this was getting uglier and uglier,” adviser Dan Tarullo recalls.

  In August, the jobless rate jumped to 6.1 percent, the largest monthly spike since 1981. And in September, Paulson forced the housing giants Fannie Mae and Freddie Mac into receivership, arguably the biggest economics story of the decade before it was overtaken by events. When congressional Democrats clamored for more stimulus, Bush threatened a veto, saying the first package just needed time to work. McCain took an even harder line, promising to freeze federal spending. On September 14, nine months into the recession, a caustic Washington Post essay by McCain adviser Donald Luskin, headlined “Quit Doling Out That Bad-Economy Line,” argued that “things today just aren’t that bad,” that “we’re nowhere close” to a recession.

  The same day Luskin was spreading his good cheer—and another century-old investment bank, Merrill Lynch, was collapsing into the arms of Bank of America—Obama held his final meeting with his political advisers in Chicago. The main topic was sharpening his economic message now that McCain had pulled even in the polls. But Obama also warned that he was getting scary intelligence from Wall Street: Another bank was on the brink, and a global panic seemed imminent. He made it clear to his hacks that he would do whatever he could to help Bush avoid a disaster; when his top strategist, David Axelrod, noted that bailouts polled terribly, Obama said he wouldn’t think about that. He figured acting responsibly would be good politics, anyway. And as he told Paulson, he expected to be president. He hoped to preside over a functioning economy.

  “Barack told us: ‘By tomorrow, the world will probably have changed,’” recalls Anita Dunn, another strategist. “We were all like: Okaaaaay.”

  Lehman Brothers collapsed the next day, the largest bankruptcy in American history. Credit markets froze. Stocks tanked. Depositors began an unthinkable run on money market funds, which were supposed to be as secure as savings accounts. Hysteria erupted worldwide, with investors so desperate to park money in safe Treasury bonds that their rates of return fell below zero; peopl
e were actually paying the U.S. government to hold their money. Campaigning in Florida, McCain noted the “tremendous turmoil in our financial markets.” But he couldn’t resist his usual caveat: “Still, the fundamentals of our economy are strong.”

  Okaaaaay.

  “That day marked the end of John McCain’s campaign,” says Biden, a longtime friend of the Arizona senator. “That poor son-of-a-gun. He was dealt a tough hand.”

  The next day, the Fed had to bail out AIG, a gigantic insurance company that had fallen down the wormhole selling exotic financial instruments. McCain came out against the bailout, then changed his mind the next day.

  The economy was going down, and so was McCain.

  At Nasdaq, Obama had tried to warn Wall Street types that carnage on Main Street could create carnage for them. But the reverse was also true. A credit meltdown could make it impossible for ordinary Americans to get home loans, car loans, or business loans. A market meltdown could eviscerate their companies, jobs, and 401(k)s. AIG showed that it could even imperil their insurance policies. The Great Depression began as a financial crisis, but it’s remembered for 25 percent unemployment, black-and-white photos of impoverished families, and sagas of suffering like The Grapes of Wrath. As Bernanke says, when elephants fall, the grass gets trampled.

  “Everyone knows that depressions suck,” says Berkeley economist Christina Romer, the Depression scholar who would become Obama’s first Council of Economic Advisers chair. “But when you study this stuff, you understand that depressions really, really suck.”

  Bernanke and Paulson decided the only way to avoid Depression 2.0 would be a mammoth Wall Street rescue. They bluntly warned leaders of both parties that unless Congress quickly backstopped the banking system, the results would make the 1930s look mild. Pelosi balked at bailing out the greed-blinded gamblers of Wall Street without helping Main Street, but Paulson warned that Main Street would be eviscerated if Washington didn’t save Wall Street pronto. “Nancy, we’re racing to prevent a collapse of the financial markets,” he said.81 “This isn’t the time for stimulus.”

  For the next two weeks, Washington was riveted by the fate of Bush’s Troubled Asset Relief Program, a $700 billion bailout for the nation’s largest financial institutions. Reid, McConnell, Pelosi, and Boehner all agreed to support TARP, but Boehner struggled to persuade House Republicans to back the rescue. After doing Bush’s bidding for eight years, they were choosing an extremely inopportune time to rebel.

  Then McCain threw the negotiations into turmoil by dragging the electoral circus to Washington, impulsively announcing he was “suspending” his campaign to help forge a deal, only to change his mind the next day after a surreal White House meeting where he wouldn’t even commit to support a deal. While Obama spoke for congressional Democrats, offering constructive suggestions on a path to consensus, McCain sat sullenly at a meeting he had demanded himself. “Obama took command,” says one Republican who attended. “He was the only one who seemed presidential—not the president, definitely not McCain.” After McCain stunned the room by refusing to take a position, the meeting dissolved into shouting and finger-pointing; Paulson got on his knees to beg the Democrats not to blow up TARP. They didn’t, but Pelosi and Reid did stage symbolic votes on new stimulus spending the next day, further poisoning the atmosphere on the Hill. They knew they couldn’t pass a law, but they wanted to put Republicans on record against aid for struggling families.

  On, September 29, Pelosi marched TARP to the floor, hoping the glare of the spotlight would force Republicans to support it. But her speech blaming Republicans for the crisis only solidified their opposition, as did a barrage of F-bombs from Democratic conference chair Rahm Emanuel, a force of nature from Chicago who would soon become Obama’s chief of staff. “Rahm was standing in the middle of the well, frothing at the mouth, accosting people—that’s one of the reasons they lost,” recalls Congressman Steve LaTourette, an Ohio Republican. The vote failed, and the Dow plummeted a record 778 points.

  The crash finally inspired action. The media backlash against Republicans who had whined about Pelosi’s speech and Emanuel’s antics—as if they had voted to sink the financial system because their feelings were hurt—also helped focus minds. On Wednesday, the Senate passed TARP, sweetened by some tax breaks for racetrack owners, arrow manufacturers, and the like. On Friday, the House reversed course and passed it as well. Obama lobbied dozens of Democrats and persuaded several to flip to yes by promising a new push for stimulus. The Wall Street rescue, he told them, was like patching a hole in a sinking boat to get it to port. When he replaced Bush, Washington would finally help Main Street, and give the boat some proper repairs.

  And yes, he meant when, not if.

  McCain’s erratic response to the crisis, along with his embrace of a suddenly discredited philosophy, sank his candidacy. Obama helped his cause by remaining steady while the world fell apart. But if there were any doubt that 2008 was a change election, it evaporated when the world fell apart. The seventy-two-year-old Republican who had spent half his life in Congress did not look like change.

  “Are we sure it’s too late to hand this pile of shit to McCain and the party that created it?” Obama bantered with one of his advisers in October.

  Probably, the adviser replied.

  “Well,” Obama cracked, “at least we’re buying low.”

  — FOUR —

  “We Were Staring into the Abyss.”

  Obama’s campaign trip to Toledo in October 2008 is best remembered for his run-in with a bald, strapping, tax-averse plumber named Samuel J. Wurzelbacher, who got him to admit he wanted to “spread the wealth around.”82 McCain name-checked “Joe the Plumber” nineteen times during the next debate, and Republicans still repeat the sound bite as proof of Obama’s socialism. In fact, his argument for a more progressive tax code was about as socialist as school uniforms are fascist. He told Wurzelbacher he wanted to cut taxes for everyone with an income below $250,000—which included a certain plumber, before the five-minute chat catapulted him onto the conservative lecture circuit—while merely restoring Clinton-era rates on higher earners. Obama also explained that his wealth-spreading philosophy was about economic growth, not just economic justice, that in a demand-driven economy, there’s no consumer demand when consumers have no money. It’s the opposite of a trickle-down philosophy.

  “My attitude is that if the economy’s good for folks from the bottom up, it’s going to be good for everybody,” Obama said. “If you’ve got a plumbing business, you’re going to be better off if you’ve got a whole bunch of customers who can afford to hire you. Right now everybody’s so pinched that business is bad for everybody.”

  That’s the time for stimulus, which was what Obama came to Toledo to talk about. The next day, he unveiled his “Rescue Plan for the Middle Class,” an expansion of his January stimulus plan.83 For all the talk of socialism, its major new feature was a hiring tax credit for businesses, $3,000 for every new full-time employee. “It’s a plan that begins with the word on everyone’s mind. It’s spelled J-O-B-S,” Obama said.

  The plan didn’t get much attention, partly because plans make for dull copy, partly because media etiquette disguised how ambitious the plan was. Reporters described it as a $60 billion proposal, about the same size as the stimulus bills that Pelosi and Reid pushed during the TARP debate.84 But that’s only because the press wasn’t counting elements of the plan that Obama had unveiled earlier. Journalistic conventions aside, Obama was proposing to inject $175 billion into the economy, three times as much as the Democrats in Congress.

  “By October,” Furman says, “the world had changed.”

  The hole in the economy now looked like a canyon, so more stimulus would be needed to fill it. And recessions sparked by financial distress are much nastier and longer than normal downturns, so the definition of what counted as “timely” stimulus could be stretched. Obama’s new plan included public works, like energy-efficient school retrofits as wel
l as typical road and bridge repairs, even though his economic team considered infrastructure projects a leisurely way to move money. Obama even proposed some of the low-income heating aid that his economists had mocked in Hillary Clinton’s stimulus proposal.

  “We were no longer thinking solely about speed,” Goolsbee says. “This was a totally different ball game. We were staring into the abyss: ‘Whoa, is this the start of another depression? Is this something that could go on for years?’”

  Consumer confidence was at a forty-year low. The Dow was still plunging, the auto industry was hemorrhaging, and Bernanke was blasting out emergency loans as if he were allergic to money. Polls suggested only 5 percent of Americans thought the country was headed in the right direction, and you had to wonder what those 5 percent were smoking. Obama was buying low, all right. In his Toledo speech, he was already trying to temper expectations about the recovery. “I won’t pretend this will be easy,” he said. “George Bush has dug a deep hole for us. It’s going to take a while for us to dig our way out.”

  He just didn’t realize how deep a hole, or how much digging would be required. At the time, $175 billion worth of backfilling seemed extraordinarily aggressive, more than the Pentagon spent that year on the war on terror.

  “We thought we were pushing the envelope,” recalls Brian Deese, Furman’s deputy for economic policy. “It was amazing how fast what was considered substantial kept changing.”

  Once again, a Washington consensus was emerging for government action. The Washington Post reported that “stimulus proposals are proliferating like Halloween pumpkins,” and even the conservative Washington Times noted widespread agreement that “the next administration should—initially, at least—open its wallet, not tighten its belt.”8586 McCain proposed emergency tax cuts, and Bernanke, who usually tiptoed around fiscal issues, urged Congress to enact a “significant” stimulus to prop up the economy. Pelosi and Reid threatened to call Congress back after the election to pass another $150 billion stimulus.