White House chief of staff Rahm Emanuel just had to scratch that itch. Speaking for the President and to the New York Times yesterday, he called the contretemps over the AIG news a "distraction" from the "main priority of getting the financial system stabilized." It is worth unpacking these words. Emanuel did not mean to betray an ambivalence about the outrage of the bonuses. Remember: the chief is supposed to be the longest-term thinker in the White House. He knows that the White House either rolls back on its heels, becomes defensive, and yields to the diversion, or Obama uses AIG as an example to catalyze public support for significant regulatory reform.
Secretary Tim Geithner, his deputies and other administration officials have been working with corporations to craft these proposals. Indeed, Geithner's gotten a lot of guff for allegedly being too friendly with the banks; the administration has vacillated between tough anti-Wall Street rhetoric and prudence (or excessive caution) when it comes to asserting its domain. Today, Obama seemed to indicate the Era of Good Feeling is over. "Just as outrageous," he said, is the "culture that these bonuses are a symptom of a situation where excess greed, excess compensation, excess risk-taking have all made us vulnerable and left us holding the bag." He addressed Wall Street directly: "As we get out of this crisis, as we work towards getting ourselves out of this recession: I hope that Wall Street and the marketplace don't think we can return to business as usual."
This is more than tough rhetoric: I take this to mean that the administration will use the AIG crisis to take a more active role than it otherwise would have. Wall Street has been waiting for the Treasury Department's plan to mitigate the poison and the credit-market-locking effect of toxic assets held by major banks. The administration's economic commanders would prefer to create public-private partnerships to remove those assets from the books of especially troubled institutions; the government and corporations would share the risks. When Obama says explicitly - "My interest is not protecting the banks," he's scaring that capital away. Why would a hedge fund want to subject itself to the scrutiny that AIG is currently receiving?
One sign that Obama really means this: he called Tim Geithner the hardest-working Treasury Secretary since Alexander Hamilton and is standing by a man who is now thoroughly distrusted by the finance sector of the economy. Make no mistake: you can blame - or credit - CNBC with introducing the notion that, because Geithner doesn't inspire confidence, whatever that means, he might want to think about resigning.
I don't believe the administration is worried about rhetorical overkill, either; what they don't want is a singular focus on AIG. Democrats seem incapable of explaining why the bonus codicil was added to the stimulus package, and so there's a danger of backlash if the public decides to blame the party in power.
Several senior administration officials explain the reasoning this way: they believe that Wall Street and the financial industry have no credibility with the American people; every day, with every new revelation, Old Capitalism (my phrase) discredits itself. The public may be skeptical of particular solutions, but they have faith in Obama's ability to dictate the terms of the recovery.