With the Geithner “wunderkind” and Summers “socratic genius” brands badly damaged, Obama faces pressure from a broad and growing spectrum to find new front men for his economic policy team.  This was in evidence last week when Paul Volcker and Austan Goolsbee were trucked in from oblivion to champion Obama’s new bank reform agenda.

Volcker and Goolsbee, though they’re only marginally more progressive than Geithner and Summers, present a serious threat to the power network behind Obama’s “bankers bonanza” economic policies.  Whereas Summers and Geithner owe their public lives to Robert Rubin–the man behind the curtain in Obama’s first year–Volcker and Goolsbee owe him relatively little, which is presumably why they were banished in the first place.  Establishing Volcker and Goolsbee more prominently in the White House coterie would present the first major threat to the Rubin axis in the West Wing, which, in addition to Summers and Geithner, includes administration insiders Peter Orszag, Michael Froman and Jason Furman.

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The front page of the New York Times says it all this morning: “The treasury secretary told a House panel that failure to provide A.I.G. with the $85 billion bailout would have been “catastrophic” for the economy.” Both Paulson and Geithner also defended their actions with the old warning about the imminence of a “second Great Depression.”

As I noted yesterday, Geithner is also telling us that a failed Bernanke confirmation effort would have catastrophic consequences for financial markets. Geithner and other Wall Street policy elites are old hands at this: they’ve used the same rationale for every massive financial bailout of the past generation, from the Mexican bailout to Long Term Capital Management to AIG.

Notably, they’ve used the same excuse to argue against financial regulation. When Brooksley Born wanted to regulate derivatives, Summers, Rubin, and Greenspan told her that she was going to cause a financial crisis. Of course, the opposite was true: they didn’t regulate derivatives, and it caused a massive financial crisis.

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In early March, as the AIG bonus controversy fueled public outrage at Wall Street’s chief enablers in Washington, it looked like Treasury Secretary Geithner would be forced out of his post before he got a chance to smell the cherry blossoms. Their backs to the wall, Geithner and friends subsequently waged a confidence game, slinging together an alphabet soup of Wall Street rescue programs (remember TALF?) formulated in close consultation with market movers.

The strategy worked, and we’ve seen an extended sucker’s rally since March — enough to convince the media and political establishment that the economy is sound, despite plenty of evidence to the contrary (chief sucker: David Brooks).  This is best illustrated by this chart of the Dow in 2009:

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While Goldman Sachs‘ managing partners prepare their lists for Fifth Avenue shopping sprees on bonus day, the firm’s public relations department is grappling with an image problem that has some staying power. Goldman’s record profiteering at a time of chronic unemployment and systemic crisis along with Matt Taibbi’s superb article on Goldman’s role in market manipulation and the high-profile arrest of former Goldman programmer Sergey Aleynikov, who allegedly downloaded Goldman code that can be used to manipulate markets (who knew?), have conspired to create a perfect storm of populist backlash directed at the firm.

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To paraphrase Paul Krugman, it looks like the zombies have won. Insolvent banks continue to roam the earth, sucking up unfathomable sums of taxpayer capital, provided to hedge fund intermediaries as nonrecourse loans. The scheme is designed to create inflated “auction” prices by incentivizing investors to over-bid on assets which carry almost no downside risk – for them, that is.

Geithner, Summers and company test-marketed the plan with friends and former colleagues on Wall Street thoroughly over the past month to find the formula that would send high finance into the fits of ecstasy we witnessed on Monday. Hedge fund directors were among Treasury’s most coveted focus groups.

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