Do You Have to Be Clueless About the Economy to Talk About Fiscal Responsibility?

06/20/2010 05:12 am ET | Updated May 25, 2011
  • Dean Baker Co-director, CEPR; author, 'The End of Loser Liberalism: Making Markets Progressive'

This is a question that people should be asking, given the list of prominent economists and economic analysts who are headlining the debate on deficit reduction. To kick off his deficit commission, President Obama is planning a big show on April 27th that will include a number of experts talking about the need to reduce the deficit. Not one person among this group saw the housing bubble and the risks that it posed to the economy.

The next day, billionaire Wall Street investment banker Peter Peterson is sponsoring a daylong deficit-fest. Peterson not only excluded all of the economists who had warned of the bubble, his show actually features the leading villains in this story. Peterson has invited former Federal Reserve Board Chairman Alan Greenspan and former Treasury Secretary and Citigroup top honcho Robert Rubin to lecture the country on the need to tighten our belts.

Just to remind folks, Greenspan was the guy who insisted that everything was fine, as the housing bubble grew ever larger. As more and more junk loans got pushed out the door to people who obviously could not afford them (this is not hindsight, it was known at the time to those of us who passed their 3rd grade arithmetic class), Greenspan touted the innovations in the financial system that were allowing more people to become homeowners. And, as Goldman, Lehman, Citigroup and the rest pushed complex derivative instruments around the world, Greenspan applauded their ability to diversify risk.

After leaving the Fed, Greenspan cut a multi-million dollar book deal, made numerous speeches for several hundred thousand dollars a pop, and now draws a million dollar a year salary from hedge fund manager John Paulson. (Yes, the same Paulson featured prominently in the Goldman indictment.) This is of course in addition to drawing a pension from the federal government that is many times more generous than the Social Security benefits that he wants to cut.

Robert Rubin comes in a close second in terms of blame for the crash and the crisis. He deserves at least as much credit as Greenspan for setting the economy on its bubble driven growth path. When he was Treasury Secretary he pushed the high dollar policy that made U.S. goods uncompetitive in the world, reversing the position of Lloyd Bentsen, his predecessor, who was happy to see the dollar decline in order to eliminate the trade deficit.

Rubin put muscle behind his high dollar rhetoric when he got the IMF to impose harsh conditions in its bailouts following the East Asian financial crisis. The deal was that the troubled countries had to repay their debts in full, but the United States allowed them to export like crazy to get the money to make the payments. The lesson to other developing countries was that it was necessary to build up huge amounts of reserves to avoid ever being put in this situation by the IMF. This meant lowering the value of your currency relative to the dollar in order to accumulate dollar reserves. For the U.S. it meant a massive trade deficit. This trade deficit was one of the central imbalances that led to the housing bubble.

Rubin was also a top advocate of deregulation of financial markets. This included the repeal of Glass-Steagall allowing holders of government guaranteed deposits to get involved with high risk trading. He also prevented the regulation of credit default swaps and other derivative instruments, stepping in to obstruct the efforts in this direction by Brooksley Born, the head of the Commodity Futures Trading Commission.

After leaving the Clinton administration, Rubin took a top job at Citigroup to enjoy the fruits of his labor. He made over $110 million for his work before leaving in the fall of 2008. At the time, Citigroup was on the edge of bankruptcy, only kept alive by virtue of tens of billions of taxpayer dollars and the promise of hundreds of billions more, if the bets by the Rubin crew soured further.

So, the country is supposed to listen to lectures on the need for belt-tightening from Greenspan, Rubin and a whole group of other luminaries who could not see the $8 trillion housing bubble that wrecked the economy and put 15 million people out of work. While it is obvious that this elite group cares little about the well-being of ordinary people, the remarkable part of this story is that the bubble was the most important item even from the standpoint of the issue that these folks care about most: the deficit.

The economic collapse that followed in the wake of the crash of the housing bubble is projected to add more than $4 trillion to the debt by 2020. This is due to the lost tax revenue, higher benefit payments, financial bailouts, and stimulus spending.

In other words, even if Greenspan, Rubin, Peterson and the rest did not care about all the damage that would be done to people lives by this earthquake, but only about the deficit, they still should have been jumping up and down yelling about the housing bubble. But this gang did not issue warnings: they said that everything was just fine. And now they want to tell us that we have to cut our parents' Social Security and Medicare. Everyone should give their arguments the attention they deserve.