Progressive economists have one piece of advice for President Barack Obama when it comes to replacing top economic adviser Larry Summers: No more Robert Rubin disciples.
Summers, who served as head of the White House's National Economic Council, a position created by former President Bill Clinton and first filled by Rubin, was a key architect of the administration's various economic policies to combat the biggest financial crisis and economic downturn since the Great Depression.
Those policies -- the bailout of Detroit automakers, an $814 billion stimulus package, subsequent programs under TARP, Cash for Clunkers and the administration's unlimited backstop of Fannie Mae and Freddie Mac -- arguably saved an economy that many considered to be on the verge of collapse.
But while the recession officially ended last year, it hasn't for most American households. The unemployment rate has risen nearly two percentage points since Obama took office, Labor Department figures show. Private-sector job creation is anemic. Growth has stagnated. Incomes have barely risen. Unpaid debts are being written off. And household wealth is lower today than where it was last December, according to Federal Reserve data through June.
Treasury Secretary Timothy Geithner refused to say Wednesday during a Congressional hearing whether the U.S. is officially out of the recession.
Large banks and corporations, on the other hand, are thriving. Corporate profits have risen to pre-crisis levels, according to the Commerce Department. Company balance-sheets haven't been this strong since 1956, Fed data show. Firms with access to the capital markets are taking advantage of record-low interest rates and refinancing expensive debt, and pocketing the difference. Last month, IBM sold three-year notes to investors, offering 1 percent interest. On Wednesday, Microsoft Corp. sold three-year notes at 0.875 percent interest to help fund share buybacks and increased dividends for shareholders. It's reportedly the lowest interest ever offered by a company looking to sell three-year debt.
A key lieutenant to Rubin after the former Goldman Sachs head and Citigroup chairman became Treasury Secretary under Clinton, Summers eventually succeeded him in that post. Together, the two men advocated for the repeal of Glass-Steagall, a Depression-era law that separated commercial banking activities from investment banking, and fought to deregulate the derivatives market. They aggressively fought back against other regulators who wished to rein in risky derivatives activities.
During this administration, Summers fought back against against more aggressive financial reform measures, people familiar with the discussions say.
Armed with an opportunity to get other points of view into a White House whose economic agenda has been derided by both the left and the right, progressive economists and other market participants want to see someone in Summers's role who will pursue policies that will clean up the toxic assets lying dormant on bank balance sheets, restart lending and allow for robust job creation.
Dean Baker, co-director of the Washington-based Center for Economic and Policy Research, said he's like to see economists like James K. Galbraith, a former executive director of the Joint Economic Committee and presently a professor at the University of Texas at Austin; Robert Pollin, an economics professor at the University of Massachusetts, Amherst, and co-director of the Political Economy Research Institute; Eileen Appelbaum, an economist at Baker's CEPR and a former professor at Rutgers University, where she led the Center for Women and Work researched labor and employment issues; and Heidi Hartmann, president of the Washington-based Institute for Women's Policy Research and a professor at The George Washington University.
Baker acknowledges that his candidates "would never be considered," adding that "I don't want to think about who we will actually get."
Robert Johnson, director of financial reform at the New York-based Roosevelt Institute and a former managing director at Soros Fund Management, said he'd like to see Jon S. Corzine, chairman and CEO of MF Global Holdings and a former head of Goldman Sachs and governor of New Jersey; J. Bradford DeLong, an economics professor at the University of California at Berkeley and a former top Treasury official during the Clinton administration; Leo Hindery, Jr., chairman of the Economic Growth/Smart Globalization Initiative at the New America Foundation and a HuffPost blogger; and Donald W. Riegle, Jr., a former U.S. senator and chairman of the Senate Banking Committee and current chairman of APCO Worldwide's government relations team.
Johnson also endorsed Federal Reserve Bank of Kansas City President Thomas M. Hoenig. The Fed chief, who serves on the Fed's policy-making body that sets interest rates, has advocated breaking up megabanks and forcing banks to shed their risky derivatives-dealing operations. The longtime regional Fed president has served in his current role for 19 years.
Like others, Johnson said, "No more Rubinites."
Simon Johnson, former chief economist of the International Monetary Fund who presently serves as a professor at the MIT Sloan School of Management and as a contributing editor to The Huffington Post, said he'd like to see Joseph Stiglitz, former chief economist at the World Bank and a former chairman of the White House's Council of Economic Advisers under Clinton; Paul Krugman, a Nobel Prize-winning economist and columnist for the New York Times; and Alan S. Blinder, a Princeton professor and former member of Clinton's CEA and a vice chairman of the Fed's Board of Governors.
Market participants added other recommendations. Andrew Busch, global currency and public policy strategist at BMO Capital Markets in Chicago, said he'd like to see two veterans of the Clinton administration: Robert Reich, former Labor Secretary, or Gene Sperling, who held Summers's job under Clinton and now works as a counselor to Geithner.
"Anything that sounds or looks like Krugman will be a disaster," Busch added.
Richard Bove, one of Wall Street's top banking analysts, told clients in a Wednesday note that the failure of Summers and the rest of the Obama team was a fundamental misunderstanding of the causes of the financial crisis. Bove, of Rochdale Securities, said the crisis was a result of years of over-consumption and underproduction in the West which caused money to flow to Asia and other big exporters, which caused debt accumulation in the U.S. and a desire for higher-yielding securities -- like subprime mortgage-backed securities -- elsewhere.
"Larry Summers and his group failed to grasp the simple point that the U.S. must sell things to get the flow of funds to reverse back to the United States," Bove wrote. "Instead they continued to believe that consumers should buy things.
"This was a mistake that neither Germany nor Switzerland made. Thus, those economies, which emphasize production rather than consumption, expand while ours flirts with a new recession."
Bove titled his note, "Mr Summers' Failure."
David A. Rosenberg, chief economist and strategist at Gluskin Sheff & Associates in Toronto, shared a note with clients Wednesday that he received regarding Obama's policies which he agreed with:
"With respect to the failure of White House economic policies to turn things around (we don't accept that the grading should be done on the premise that 'oh, well, things would have been worse without all the government incursion and intervention' -- isn't the jobless rate supposed to be at 7 percent by now?), we received this little ditty yesterday from a reader on the West Coast that resonated with us:
You pointed out that FDR worked out the WPA at lunch one day and put Americans to work, paying them to build the Golden Gate Bridge, while Obama is mailing Americans 99 weeks of unemployment checks -- the modern soup line. Well, it's worse than that. Think about it: FDR borrowed that money, mostly from Americans, and sent it to American workers who bought American goods. Today Obama is borrowing money from China and sending it to Americans entitled to 99 weeks of no-work-pay, I mean unemployment insurance, and they are taking it over to Wal-Mart and sending it to Chinese workers. Go figure....
Regardless of whom Obama picks, Galbraith said that the "essential thing is not a shift in ideological perspective."
"It would be having a broader and more open group at the top," Galbraith wrote in an e-mail. "I'd guess Summers took a number of positions inside the administration (we've seen an example with Steve Rattner's account of the auto bailout) that were progressive by his own lights. But on certain critical issues -- and especially banking, so far as I understand it -- the alternatives he didn't like were simply frozen out."
The administration, though, reportedly is keen on bringing in someone with significant business experience, like a CEO. Anne M. Mulcahy, the former CEO of Xerox who's been lauded for her leadership atop the company, is said to be a leading contender, despite the fact that Xerox's share price dropped 16 percent during her tenure. Other candidates include Laura D. Tyson, a professor at the University of California at Berkeley who separately headed both the National Economic Council and the Council of Economic Advisers under Clinton. Tyson is a longtime member of Morgan Stanley's board of directors, a position she's held since 1997.
Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co., told the Roosevelt Institute's blog New Deal 2.0 that it's critical for Obama to pick someone who will clean out the financial system.
"While I can't question Summers' intent or interest in being part of the solution to this economic crisis his departure, on the eve of a double dip, demonstrates what some of us have known for a while.
"Yes, the government needed to act, but the kick-the-can policies of the Obama administration have mired us more deeply in a structural morass. Hopefully the President will replace Summers and Geithner with a team that recognizes that sweeping problems under the rug undermines confidence in our economy and markets and doom us to a long contraction driven by a weak banking system. It's time to address the troubled assets that remain on our banks balance sheets so they can be healthy enough to lend and have confidence that they will again lend."
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