Why Obama is in bed with the fat cats

To reduce unemployment, the president has two choices: Either drive up the national debt or help fat cats get even fatter.

"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street," President Obama told Steve Kroft of 60 Minutes. In a narrow sense, that may be true. But Obama did run for office in part to keep the unemployment rate from rising to—and staying above—10 percent. And his pursuit of that end has aligned him with the fat cats.

In a financial crisis like the one we are in, spending falls and unemployment rises. To curb the rise in unemployment, something has to be done to boost spending. There are two broad mechanisms. First, Obama could use the government directly to boost spending—nationalize banks and get them to lend to people who will spend; order government-sponsored enterprises to lend to farmers, home buyers, and others who will spend; and boost direct government purchases.

With the rollout of its $787 billion stimulus plan, the administration has done a little along those lines. But using government to boost spending also requires boosting the short-term government budget deficit extravagantly. And it is clear that Obama thinks he did not run for office to do that.

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So the first mechanism is out. What is the second?

The second is to persuade the private sector to boost its spending. It is to use the government indirectly—by making households feel that they are richer and can spend more; making businesses feel that their expansion plans will be profitable (and thus justify spending more); making banks feel that additional lending to businesses will be safe and that they can reliably profit by lending more.

Government achieves this by intervening in financial markets to change the balance of supply and demand in order to boost asset prices, including real estate, businesses, stocks and corporate bonds. As a result, consumer households feel richer and willing to spend more; businesses feel optimistic about expansion and willing to spend more; banks feel that additional lending to businesses is safe and profitable.

But for indirect government policies to boost spending, asset prices must rise—especially long-term, risky asset prices. And guess who owns the most long-term, risky assets? Guess who benefits most when those long-term, risky asset prices rise?

Yep. It's fat cat bankers. That's what fat cat bankers do: They raise money—mostly by borrowing—from people who want to keep their wealth liquid and relatively safe, and they use this money to buy long-term risky assets, relying on their technical skill and judgment to preserve a margin between what they are paid by borrowers and what they must pay, in turn, to their creditors.

In a crisis like the present one, if you avoid the nationalization and extravagant deficit-spending route, and you still succeed in avoiding persistent mass unemployment, you will have done so by a process that boosts asset prices and enriches fat cat bankers.

The fact that the policies you undertake to avoid persistent mass unemployment also help fat cat bankers doesn't mean that you can’t implement other policies to place burdens on them. Progressive income and wealth taxes, tight capital and regulatory requirements, impositions of enormous risk on financiers in order to remove the possibility that they will retain their wealth even as their organizations go bankrupt—these are all policies that make fat cat bankers' lives less fat and less feline. And I am strongly in favor of enacting all of these long-term structural reforms.

But there’s no point in pretending that the policies that avoid persistent mass unemployment are not the same policies that enrich fat cat bankers. They are. At this moment, what is good for JPMorgan Chase is good for America—and vice versa.

In effect, Obama did run for office to help out a bunch of fat cat bankers on Wall Street. He just may not have realized it at the time.

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Brad DeLong is a professor in the Department of Economics at U.C. Berkeley; chair of its Political Economy major; a research associate at the National Bureau of Economic Research; and from 1993 to 1995 he worked for the U.S. Treasury as a deputy assistant secretary for economic policy. He has written on, among other topics, the evolution and functioning of the U.S. and other nations' stock markets, the course and determinants of long-run economic growth, the making of economic policy, the changing nature of the American business cycle, and the history of economic thought.