The New New Deal (10 page)

Obama explained that he loved alternative energy. It just wasn’t the fastest stimulus. “That’s not going to deal with the immediate crisis,” he said. His campaign handouts were even more emphatic about three-T-only: “The goal should be to lessen the pain that would occur from an economy-wide slowdown, not to use economic hardship as a rationale for enacting an ideologically driven policy agenda.” Those words would resonate a year later, too.

But in early 2008, Obama was the only candidate with a stimulus plan that was all about stimulus. When the
Washington Post
’s Marcus graded the campaign proposals, Obama won easily with an A-minus.
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Clinton got a C-plus, McCain a D-plus.

“The moment for stimulus will be long past by Inauguration Day,” Marcus wrote, a line that wouldn’t resonate at all a year later. “But as a way of judging how candidates balance politics and policy … the proposals offer a revealing report card.”

T
he moment for stimulus had arrived. But it depended on a quick bipartisan deal, which seemed about as likely as a quick Middle East peace treaty.

Washington really was as polarized as the talking heads said it was. In Congress, almost every vote was a party-line vote. House redistricting had produced reliably Democratic and Republican seats, encouraging incumbents to pander to their bases, rewarding extremism while punishing cooperation. Members flew home every weekend and spent their spare time fund-raising during the week, so they no longer hung out in noncombat situations; Ray LaHood, an Illinois Republican who would become Obama’s transportation secretary, had organized bipartisan get-to-know-you retreats, but they were canceled for lack of interest. The rise of talk radio, cable blab shows, political blogs, and the twenty-four-hour news cycle only widened the divide, encouraging
increasingly sensational attacks in much the same way SportsCenter encourages increasingly sensational dunks. Every day was election day, and in a zero-sum game, party discipline was paramount; if the blue team said the sky was blue, the red team called a point of order.

By 2008, Bush’s approval rating had collapsed, but he was staying the partisan course, starting the year by vetoing a Democratic expansion of health coverage for uninsured children even though it had some Republican support. Democrats weren’t in a compromising mood, either. They had taken back Congress in 2006 with a Bush-bashing message, and it’s tough to cut deals with someone you’ve portrayed as a heartless Neanderthal; it makes your base wonder how you could work with such a monster, and independent voters wonder if you exaggerated his monstrosity. Anyway, Speaker Pelosi, an organic-kale San Francisco liberal with a grating voice that made her sound like the nanny state come to life, was just as polarizing as the swaggering Texas cowboy in the White House. She was nails on the blackboard to Republicans, a screechy symbol of lefty extremism. Conservatives loathed her, and many of the congressional moderates who merely disliked her had been defeated in the Democratic wave.

But Pelosi, the daughter of an Italian American machine pol from blue-collar Baltimore, was much more pragmatic than her banshee-lefty reputation. Behind the scenes, she was a master vote counter and a surprisingly deft coalition builder. Her members were much more ideologically diverse than the House Republicans, so she had to keep business-friendly New Democrats and tight-fisted Blue Dog Democrats on her reservation. At times, she could be as intransigent as advertised—her no-compromise leadership helped kill Bush’s plan to privatize Social Security—but she came from an urban-boss tradition of cutting deals that got things done. As shrill a partisan as she was, it wasn’t her nature to sit on her hands to try to reap the political benefits of a recession on Bush’s watch. She was an activist. She liked to act.

For a change, Pelosi had negotiating partners willing to negotiate. Bush’s treasury secretary, former Goldman Sachs CEO Henry Paulson, was a moderate Republican who understood the art of the deal and
badly wanted stimulus. And Pelosi’s counterpart, House minority leader John Boehner, usually followed the administration’s lead. Boehner was a conservative K Street Republican whose best friends were mostly corporate lobbyists—a self-made millionaire who got into politics because he hated taxes and government interference with his plastics company.
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But he was a team player, an amiable Dean Martin type who spent most of his time chain-smoking Camel Extra Lights, drinking Merlot, and playing golf. After growing up in a home with eleven siblings and one bathroom, he was comfortable with compromise. He had tried to rein in the GOP’s fire-breathers while serving on Gingrich’s leadership team, and he had helped forge the No Child Left Behind deal.

So there was at least a chance for cooperation, especially since stimulus wouldn’t involve painful sacrifices. Politicians usually enjoy spending money and cutting taxes in election years.

O
n January 18, Bush visited a lawnmower factory to unveil a $150 billion stimulus plan, “a shot in the arm to keep a fundamentally strong economy healthy.” Obama complained that the plan’s nonrefundable tax rebates would do nothing for the working poor, but otherwise Paulson kept it relatively free of ideology; the
Post
’s Marcus gave it a B-minus. It quickly became the basis for bipartisan talks in the House’s Board of Education room, the tiny hideaway where the legendary speaker Sam Rayburn used to “educate” members who crossed him.

At first, the negotiations just highlighted the gulf between the parties. Pelosi suggested all kinds of spending programs for the needy, while Boehner wanted all kinds of tax breaks for businesses. Boehner groused that the goal wasn’t supposed to be redistributing income. Pelosi snapped that the goal was supposed to be preventing “
your
potential recession.” One Boehner aide scribbled his partisan view of the debate in his notes: “D caucus, Tax Receivers. R conference, Taxpayers.”

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.”

T
he 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.
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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.
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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.
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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; people 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.”