Ditch the smooth transition. The people voted for change

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By Naomi Klein

Instead of accepting the corrupted bail-out and reassuring Wall Street, Obama's team must start doing the hard stuff now

The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bail-out is not merely incompetent: it is borderline criminal.

In a moment of high panic in September, the US treasury pushed through a radical change in how bank mergers are taxed - a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140bn in tax revenue, legislators found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "[the] treasury had no authority to issue the [tax change] notice".

Of equally dubious legality are the equity deals the treasury has negotiated with many of the banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals: "Any use of these funds for any purpose other than lending - for bonuses, for severance pay, for dividends, for acquisitions of other institutions ... is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion that America's central bank, the Federal Reserve, has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg news service believes this secrecy violates the law and has filed a federal suit demanding full disclosure.

Yet the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140bn in missing revenue is almost the same sum as Obama's renewable energy programme. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

Yes, there is only one president at a time, but that president needed the support of powerful Democrats - including Obama - to get the bail-out passed. Now that it is clear the Bush administration is violating the terms to which both parties agreed, the Democrats have not just the right, but a grave responsibility, to intervene forcefully.

I suspect the real reason the Democrats are failing to act has less to do with presidential protocol than with fear: fear that the stockmarket, which has the temperament of an over-indulged two-year-old, will throw one of its world-shaking tantrums. Disclosing the truth about who is receiving federal loans, we are told, could cause the market to bet against those banks. Question the legality of equity deals, and the same thing will happen. Challenge the $140bn tax giveaway and mergers could fail.

More than that, the Democrats, including Obama, appear to believe that the need to soothe the market should govern all key economic decisions in the transition period. Which is why, just days after a euphoric victory for "change", the mantra abruptly shifted to "smooth transition" and "continuity".

Take Obama's choice for chief of staff. Rahm Emanuel, the House Democrat who received the most donations from the financial sector, sends an unmistakably reassuring message to Wall Street. When asked if Obama would be moving quickly to increase taxes on the wealthy, as promised, Emanuel pointedly did not answer the question.

This same market-coddling logic should, we are told, guide Obama's selection of treasury secretary. Fox News and MNSBC explained that Larry Summers, who held the post under Clinton, is the man "the Street would like most". Let's be clear why. "The Street" would cheer a Summers appointment for the same reason the rest of us should fear it: because traders will assume that this champion of deregulation will offer a transition from Henry Paulson so smooth that we will barely know it happened. On the other hand, someone like Sheila Bair, the chairman of the banks' insurer of last resort, the Federal Deposit Insurance Corporation, would spark fear on the Street - for all the right reasons.

One thing we know for certain is that the market will react violently to anyone likely to impose serious regulation, invest in people, and cut off the free money. In short, the markets can be relied on to vote in precisely the opposite way that Americans have just voted. (A recent poll found 60% strongly favour "stricter regulations on financial institutions", while just 21% support aid to financial companies.)

There is no way to reconcile the public's vote for change with the market's foot-stomping for more of the same. Any moves to change course will be met with market shocks. The good news is that once it is clear the new rules will be applied across the board, fairly, the market will stabilise and adjust. Furthermore, the timing for this turbulence could not be better. Over the past three months, we've been shocked so often that market stability would come as more of a surprise. That gives Obama a window to disregard the calls for a seamless transition and do the hard stuff first. Few will be able to blame him for a crisis that predates him, or fault him for honouring the clearly expressed wishes of the electorate. The longer he waits, however, the more memories will fade.

When transferring power from a functional, trustworthy regime, everyone favours a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign.