President Barack Obama joked in his press conference on 24 March 2009 that the euphoria of his inauguration two months earlier had lasted only a single day. The hope he had the
audacity to proclaim is not yet dead. But - even as he prepares to
leave for a trip to Europe that will encompass the G20 summit in London (2 April), the Nato anniversary summit jointly hosted by France and Germany (3-4 April), and visits to the Czech Republic (4-5 April) and Turkey (6-7 April) - the future prospects of his presidency are already in the balance.

With great courage, Obama has insisted that he would stick to his
promises to tackle long-term failings in American society, even as he
struggled to heal the economic crisis. He continues to press for these
reforms - in climate-change policy, healthcare, public education,
dependence on imported oil, and growing inequality - even as he
grapples with the blocking of credit and the terrible unemployment that
is one of its consequences.

The week of 23-29 March saw a new twist: the emergence of a deadly
dilemma that the president has to resolve. He has learned that he
cannot unblock credit without going a long way to appease the interests
of the bankers who caused the problem in the first place. At the same
time he has become aware of the rising fury among everyday
Americans triggered by the huge bonuses paid to executives at AIG, the giant insurance company that in 2008 posted the biggest losses in American business history.

Everyone agrees that the knot that has to be cut is the astronomical
quantity of "toxic assets" poisoning the balance sheets of American
banks - as well as those European banks (the Royal Bank of Scotland,
Paribas, Deutsche Bank and UBS among them), which thought it was clever
to copycat every Wall Street fashion.

The plan unveiled by Obama's treasury secretary Timothy Geithner on 23
March hands to the banks the juiciest of "sweetheart" deals to persuade them to buy up what Geithner calls "legacy assets" (the financial
crisis has given free rein to American public life's culture of
euphemism).

The president's vice

Geithner's plan distinguishes between securities based on truly
valueless loans and those whose value has simply been depressed by the
economic downturn. It proposes that the treasury and "private
investors" - which in practice can only mean the investment banks,
commercial banks and hedge-funds which created and invested in the
toxic assets in the first place - will buy equal amounts of the unsaleable assets. But private investors will only
be able to do so thanks to a far larger injection of money to be lent
by a government agency, the Federal Deposit Insurance Corporation (FDIC).

Altogether it is calculated that private investors will contribute 6%
or 7% of the money to clean up the banks' balance-sheets. The taxpayer,
in the shape of the treasury and FDIC, will put up more than 90%. That,
in the good old days before Wall Street collapsed,
used to be called "leverage" of perhaps thirteen-to-one. With
government standing behind them to that extent, why wouldn't the banks
buy trash at prices kited with government money?

Timothy Geithner makes much of the importance of keeping the rescue in the private
sector, which it patently is not. He also speaks warmly of
the professional skills that will be devoted to the task by the very
speculators who brought the economy to its knees.

The liberal economic intelligentsia don't like it. Jeffrey Sachs calls
it a "massive transfer of wealth from taxpayers to bank shareholders".
In a deadly back-of-the-envelope calculation he estimates that the plan
will hand $276 billion - even today a not inconsiderable sum - directly
from the taxpayers to bank shareholders (see Jeffrey Sachs, "Will Geithner and Summers Succeed in Raiding the FDIC and Fed?", VoxEU, 25 March 2009).

The Nobel laureate and New York Times columnist Paul Krugman dismisses the plan as not much more than a revival of the George W Bush administration's plan to absorb the banks' toxic assets: just more "cash for trash". The economist and former labour secretary, Robert Reich, and the Columbia University scholar Joseph Stiglitz are equally acerbic (see Edward Luce, "America's liberals lay into Obama", Financial Times, 27 March 2009).

The co-editor of The American Prospect and respected commentator, Robert Kuttner,
says the Obama administration has chosen "the most expensive and risky
way of trying to recapitalise the banks, and the least likely to
succeed". Kuttner also identifies a point that is likely to be the
target of much angry criticism, namely that the president has turned to
"the same Wall Street crew" who failed to handle the situation under
the Bush administration, and indeed who were largely responsible for
what went wrong in the first place: Robert Rubin, Laurence Summers, and
their protégés (see Robert Kuttner, "Geithner's last stand", Huffington Post, 22 March 2009).

If anyone had any doubts about who would benefit from the Geithner
"public-private partnership", they had only to watch how the stock
market responded. Bank shares overall rose by 10% in the aftermath, but
the biggest banks that have survived did better than that. Citigroup was up 19%; Bank of America shot up 26% in heavy trading; Wells Fargo's shares rose by 24%, and J.P. Morgan Chase's by 25%.  A day later, however, the wave of market enthusiasm had subsided.

The truth is that Obama now finds himself in a new vice. He feels he
needs people from Wall Street to solve the street's problems. That is
one reason why it has taken him so long to fill the key jobs at the
treasury under Geithner. At the same time he clearly underestimated the
rage Main Street citizens feel both at the AIG bonuses and the broader
proposition: that while they face losing their jobs and their homes
because of the folly and greed of the financial sector, the only people
who walk away laughing are the folks who caused the disaster in the
first place.

No wonder that questions are being asked about the ubiquitous presence
of present and former executives of Goldman Sachs in the Obama
administration, just as in the ranks of its precedessor.

A time to choose

Barack Obama showed in his long campaign for the presidency that he is
a very skilled politician. He is also by temperament cautious, even
conservative. His instinct is to "reach across the aisle" in order to
cure what he sees as the excessive partisanship of the years since the "Reagan revolution". He
is too a patient man. But now he understands that he has got to move
fast if he is to save the hopes of his presidency (see "Barack Obama: don't waste the crisis", 6 February 2009).

In this the president is both beneficiary and victim of larger historic
forces. The same event that cleared his way to the White House, the
financial crisis symbolised by the fall of Lehman Brothers on 15
September 15 2008, may have made it impossible to govern; or at the
least, may mean that he will have to sacrifice at least some of his
hopes of long-term reform (see "The week that democracy won", 29 September 2008).

In the short term, in order to heal the financial crisis it looks as though he has had to put the fate of his administration in the hands of the men from Wall Street.

Amid the stock-market panic of 1907, the financier JP Morgan was surprised that President Theodore Roosevelt didn't "send your man to fix things up with my man".  It couldn't be
done like that then, and it can't be done now. But the young president
and his even younger treasury secretary have nonetheless been taught a
hard lesson in political economy.

To govern is to choose, as Aneurin Bevan - the Welsh architect of Britain's post-1945 national healthcare system
- said. It is now clear that inviting the poachers to act as
gamekeepers was a mistake. Many Americans long accepted the
conservative contention that government was the problem, not the
solution. That phase of history seems to have ended, and a progressive
president finds himself coping with a new wave of populism of a kind that seemed to have disappeared from America politics for
generations. He means to govern, and he will have to choose.

Godfrey Hodgson was director of the Reuters' Foundation Programme at Oxford University, and before that the Observer's correspondent in the United States and foreign editor of the Independent. This article was originally published on OpenDemocracy.