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Summers at Treasury: What Would We Tell the Children?
Former Treasury Secretary Larry Summers' name is consistently placed prominently on the list of candidates to be President Obama's Treasury Secretary. This is rather striking since the policies he promoted as Treasury Secretary and in his subsequent writings led to the economic disaster that we now face.
As Treasury Secretary, Summers embraced the high dollar policy promoted by his predecessor Robert Rubin. While it offered short-term benefits in the form of cheap imports and lower inflation, the high dollar also produced a large and growing trade deficit. Just like tax cuts that cause unsustainable budget deficits, the high dollar policy of the Clinton years was unsustainable over the long-run.
Trade deficits also sap demand. In Summers' Treasury years, this demand gap was made up by a consumption boom, which was in turn driven by the stock market bubble. Like the rest of the Clinton crew, Summers cheered on the stock bubble.
Of course the stock bubble was not sustainable and when it collapsed in 2000-2002, it threw the economy into a recession. While the official recession was short and mild, the economy continued to shed jobs for almost two years after the recession ended. With the over-valued dollar causing the trade deficit to continue to rise, the only way to sustain demand was another consumption boom, this one driven by the housing bubble.
Greenspan kept interest rates at 50-year lows, while the housing bubble expanded to ever more dangerous level. Summers was no longer Treasury secretary at this point, but he did have ample opportunity to weigh in on a wide range of policy issues. While he offered his wisdom on a variety of economic issues during the housing bubble years, he never bothered to take note of an $8 trillion housing bubble or the catastrophe that its collapse would cause.
Silence was not Summers only contribution to the growth of the housing bubble. As Treasury Secretary, he had been a vigorous advocate of the one-sided financial deregulation (the Wall Street big boys all want the government security blanket of "too big to fail"). In particular, Summers had worked alongside Robert Rubin and Alan Greenspan to prevent any regulation of credit default swaps, an instrument that helped provide the financial fuel of the housing bubble.
The collapse of the housing bubble has left one-fifth of homeowners underwater in their mortgages, owing more than the value of their house. Tens of millions of homeowners now find themselves at the edge of retirement with almost nothing other than their Social Security to rely upon. And the economy will quite likely experience the worst recession since World War II as it struggles to overcome the loss of $8 trillion in housing bubble wealth.
Given this record of failure, the question is how can Larry Summers still be considered for the top economic position in the Obama administration? This would be like appointing the arsonist who burned down the city as the new fire commissioner. We like to tell our children that success is rewarded and that failure is punished. But if Larry Summers ends up as Treasury secretary, what are we supposed to tell the children?
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Larry Summers, Robert Rubin, William Daley, Rahm Emmanuel all have made fortunes working for mortgage banking after government service. Emmanuel, the top advisor to Obama, made 16.2 million dollars in 21/2 years of working as an investment banker He also picked up another $250,000 as a member of the Board of Directors of Freddie Mac at a time when the board was criticized for overt attempts at political influence through campaign contributions. He was appointed by Clinton to the position. How do you become an investment banker with a Masters degree in Speech and Communication? Perhaps you get paid for the influence and political connections you can provide. . It seems to me that all these men are not really providing tangible services as much as using political connections to enrich themselves. The money that is given out in bonuses to incompetent bankers, or in huge salaries for political connections, is so out of proportion to the services rendered as to be obscene. It seems to me most of the econmic advisors on the stage with Obama are in the business of getting rich helping the rich get richer.
What did we tell the children when we learned that the man responsible for many of the security features in checks today were designed by a man convicted on multiple counts of check fraud? They even made a movie about the guy.
You make some excellent points, but there are bigger tends in play that seem to remain under the economic radar. The greatest mega trend of all is that America’s gigantic post WWII advantage over the world’s other nations has finally run out. At the end of WWII our enemies where in ashes and our friends bankrupt. So until the mid 70’s we were the manufacturing king of the world. Then until around 2000 we were still the technology leader. Finally as our technology edge ran out, to keep our high life going, consumers borrowed their way to the good life until the weight of their credit burden could no longer be sustained and everything came crashing down.
Now on the heels of this more than half century American economic bubble, baby boomer demographics as a driver of the economy is about to turn south, as this population bubble passes its peaking buying years. So no matter what the import export situation remains, there is nothing left within the American consumer sector with which to drive the economy. It all depends on government backed infrastructure type public works to get things going.
Well, Obama raised a lot of money in the election from Wall Street, so big favors are due in. Every indication since the summer is pointing to a very conservative administration, perhaps even more so than Clinton. Whether its FISA, the bank bailout, AIPAC, escalation in Afghanistan, this incipient administration is already heading towards a very dark turn.
Dean,
I agree with your post and your comments regarding Summers.
Your last sentence sums it up:
“But if Larry Summers ends up as Treasury secretary, what are we supposed to tell the children? “
Suggestion: What ever were we thinking - ??? let’s give the guy another chance, what could possibly go wrong this time??? ( ala the Jack Warden TV show "Crazy Like a Fox")
How indeed? Change...wish I had some. Waiting for sanity to return is a fool's errand.
Forget Summers
What will we tell our children and our grandchildren when they ask why we squandered our national patrimony and doomed them to a lower standard of living than we had
We really didn't give a rodent's posterior for you and your lives....
(1) Our SUVs were more important tor us than making the necessary sacrifices to have an intelligent energy policy
(2) Our consumption and need to party were more important than living within our means both as a nation and pesonally
(3) Needless foreign wars and imperial ambitions were more important than investing in infrastructure in this county, in education - in building the basis for continued economic growth and prosperity
(4) Make yourself a pair of bootstraps and raise yourself up - we had a heck of a good time with your patrimony
Dean
I have my own reservations about Summers. Question is what is his positions now. What would he do now. Many people learn quickly from mistakes and can evolve. Let him explain where he stands now before we pass judgement on him.
No, if there are questions about his positions, doubts about whether he has learned from the history he helped make then he can sit on the sidelines this time. There are plenty of smart economists and financial specialists who didn't believe that you could mortgage a country and never have to pay the cost- let us find one of them. The time has come to let that fallacy go and now is not the time to find out whether or not Summers has done that.
Ron Paul for Sec. of Treasury.
Timothy Geitner sounds like a good choice; competent public servant without Clinton-era baggage. In his position he has been involved in the intricacies of the current bail-out; he knows the system. He is pro-regulation. It strikes me that he would be selfless in working for the type of change Obama stands for and the country needs.
Mr. Geitner gets my vote for the job! I hope the Obama transistion team is reading this!
Concur - Geitner is a good choice for his knowledge of the "rescue" or bail-out, if you prefer.
(Libertarian ? In good spirit, consider the following: voting libertarian is like hiring a carpenter who thinks hammers are evil.)
I am very disappointed tht so many Clintonistas as included in Barack Obama's planning. We all know that is in the past and should stay there. if Barack does not keep up with "Change" and "Hope" he will last 4 years or less. We expect more of you, Barack.
What on earth is wrong with these folks. Paulson is giving taxpayer money to millionaires, no strings attached. No one is monitoring this. We need to move forward. I am not an economist but I do understand Macro Economics and we are failing miserably. This cannot be solved with tired, tried, old ideas. We need new ideas, new people. I truly hope not to see any "OLD" Clintonistas in Barack's Cabinet. We WANT CHANGE, and WE WANT IT NOW! Somehow we have to make sure he doesn't slide back.
Clinton failed. Particularly on the economy. We need regulation. Our economy is based to too many different strings to look backward instead of forward. Have you noticed how all of our policies hurt the U.S. but help our neighbors? Why? We need to bring back our jobs, we need to be proud of what we produce. We don't need more junk from China, not to mention food products that kill us. We are far too trusting.
Dean, you have called this the way it is.
Thanks for the great article, brother.
'Like hiring an arsonist for fire commissioner.'
That's how I feel. I am sick and tired of the simplistic incompetence canard. That wasn't an eight-year long oops moment we just went through!
Between the outdated reductionism, unexamined Newtonian mechanist assumptions, and Social Darwinism, the fanatics of the cult of the mythical free market have waged holy war on us for far too long.
And "bipartisan" fanatics don't cut it, either.
I've been asking this over and over: who are the NSA moles? Who are the Perkinsian Economic Hit Men? I have a hard time putting my trust in any of the cast of usual suspects.
I'm relying very heavily on experts like you to inform me of the real affiliations and possible ulterior motives of 'economists' and their brethren wolves in academic clothing. I've lost faith in all of them.
What about Stiglitz and Alice Rivlin....
The economic policies of the US are by and large less economic than politics carried on by another name. With wages stagnant, both parties encouraged the ownership society, precisely because the constant rise in real estate prices allowed home owners to borrow against the assessed value of their homes. That borrowed money allowed the public to buy consumer goods and stocks. Now the real estate bubble has broken, but what's forgotten is that the promotion of home ownership took the place of a larger problem: wage stagnation, a problem nobody in power wanted to trouble the plutocracy with overmuch. Because both parties supplicated the plutocracy for campaign cash. When the plutocracy called in their favors in the recent financial crisis, both parties jumped up to shovel treasury money in their direction.
Without a fairer share in the profits, working people have no chance to realize the American Dream, or at least they have no chance to keep it once the bubble bursts. Executive pay metastized during the last quarter century, in direct relation to the stagnation of the pay for workers. It's a political problem, that, so far, the politicians have shone very little interest in solving. And now with the New Depression(tm) upon us, prospects for job working people grows ever dimmer. Whoever the secretary of the treasury will be, the problems we face noeed to be called what they are: politcal, and in need of political solution.
Bill Clinton and his administration made many enormous mistakes with regard to the U.S. economy, many of which we are paying for now.
What Clinton did right, IMHO, was to take a strong stand on equal rights for gays and women.
So far, Obama is taking the worst from the Clinton years and ignoring the best. Let's hope this is just his initial exploration of his options, and when things in his admin begin to really take shape in a few weeks, they will look better than this.
A.) He hasn't picked anyone for Treasury yet so cool your jets.
B.) Obama came out against Proposition 8. Neither Bill or Hillary publicly denounced Proposition 8. Bill Clinton instituted Don't Ask Don't Tell essentially locking gays in the military in the closet. So I hardly give the Clintons high marks for fighting for gay rights.
C.) Obama has a 100% approval rating from NARAL and NOW. You are wrong as far as Obama ignoring women's equal rights.
I believe Obama picked Rahm Emmanuel for his chief of staff to keep him from going after Howard Dean's position as DNC Chair. Rahm's a DLC'er and has been gunning for Dean along with Hillary and the other pro-corporation Dems. As they say, keep your friends close but your enemies closer.
Actually, NOW came out against a choice of Summers. He was, if you recall, censured by the Harvard faculty, and later asked to resign as President because of misogynist statements that he made, suggesting that girls and women were inately deficient in math and science. I'm sure that Obama can find a brilliant economist who is not a bigot.
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