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?

Comments

[TimothyColman]

None of the typical D’s please. There is no change we can believe in with Rubin or Summers — wrong on free market, deregulated banks– as Dean points out better than me, these guys were yes men for Fed’s Greenspan who set up the financial disaster we have today.

And they have endorsed the consolidation of big banks getting bigger which is a disaster waiting to happen.

You want more of the same? Not me. I am sure Obama will pick someone that is great for the job and he can work with. I don't have a Treasury pick.

Here is my list for other Cabinet members.

And I don’t expect the following people to get in, but people with their values should be running these departments. Some are picked to be counterpoints to the traditional Mainstream Consciousness.

Here is my fantasy picks:

Secretary of Health & Human Services: Dr. T. Berry Brazelton — a champion of families, kids health, and gem of a human being. Make Michael Phelps Ambassador of this dept.

Secretary of Interior: Terry Tempest Williams, author

Homeland Security: Wendell Berry

Secretary of Defense: Marion Wright Edelman

US Dept of Agriculture: Michael Pollan and Barbara Kingsolver

UN: former Senator Tim Wirth (now runs the UN Foundation)

Who else?

Tim Colman

[Querent]

Open Left has started a petition to keep Larry Summers from being appointed Treasury Secretary. You can find it at:

http://action.openleft.com/page/petition/nosummers

[Barbyrah]

I wish to be respectful as I post this; that is my intent
Petition drives are meant to try and push an elected official into a corner, "demanding" a certain action either be taken or not taken. Sometimes, if addressed to many political folk at the same time over a broad geographic spectrum, it can make a difference. But to make the same kind of "demand" of a president-elect...
How do you think it could possibly play out to your advantage?
No president-elect is going to put himself in a position where it can be said of him, "Yep, the 65,000 people who signed such-and-such petition demanding such-and-such action be taken by him...were the deciding factor; he capitulated to their demands..."
Uhh...right.
(By doing this petition thing you may, in the long run, be actually forcing him to go in the OPPOSITE direction.)
P.S. "Demands"...rarely work; thoughtful, respectful, meaningful dialogue...usually does.
Thanks for considering.

[Docbcs]

Petitions, if they are well explained, and well documented, can also express the voice of one's constituents, a premise on which the Obama campaign has been based. Government is a dialogue between voters and their representatives...we do not vote to hand our representatives a blank check. That is what the Bush administration thought, and look where that got us!

[LongeDeTudo]

Well, finally a reasonable criticism of Lawrence Summers. If he is qualified to lead the Treasury, he should. If he isn't qualified to lead the Treasury, he shouldn't. But saying he shouldn't lead the Treasury because of what he said in the past at Harvard as other posters on this site have done, is just ridiculous. Admittedly, I have absolutely no clue if he is qualified to lead the Treasury or not, but if President Obama thinks he is, I'm willing to give him the benefit of the doubt.

[CBS]

It is not ridiculous. What he said indicates he does not take in and update information.

[reedmaker]

Exactly, CBS. As president of Harvard, one of the leading research institutions in the world, he was completely ignoring decades of research on the abilities of females in math and science when he made his extremely damaging comments. This man belongs no where near our government.

Please go here to read a statement by the American Sociological Association repudiating his remarks: http://www.asanet.org/page.ww?section=Issue+Statements&name=Statement+on+Summers

[Halsey]

Long....sorry...you are naive...these guys (hey..I voted for Bill C twice)...ARE a huge part of the problem...Rubin? Summers? jeezus....I voted for CHANGE...not a black Bill C... I will still adore Obama..but will be sorely disappointed if he appoints ANYONE from that clique...MY Gawd..I can't believe he's even being considered...

I work in the financial world...and deplore all these guys..no really....they have "goldman sachs" on the brain..and it is terminal...best just send them to hospice..and move on...

ARE YOU LISTENING BARAK?

[DavidFarmer]

Exactly right Longdetudo.

[Norge]

Well, we can tell our children the truth, finally. We are sorry but it is clear we adults are not really as clever, smart or wise as we would have you younger generation believe as we do not learn from our mistakes or history and much of the time we have our heads stuck in the sand. We can only hope that when it becomes time for your generation to make the decisions, you will have learned from the foolishness of your parent's generation and history will finally stop repeating itself. It would be historic, truely historic.

[DrPaulProteus]

The Clintonization of the Obama administration has begun. I thought he'd at least wait til next week.

[matrickz]

let me start by apologizing for what may be a hijack of this thread but I could not figure out how to creat my own but a conservative friend sent me this link:

http://www.carolinajournal.com/exclusives/display_exclusive.html?id=5081

needless to say I am concerned but didn't know enough on how to respond. Can the more enlightened readers out there please help me. I really what to do a reply all with an answer but have nothing to say. I want to be informed ... or as Rachel would say on MSNBC I want to "be talked down" LOL.

[Querent]

The article you reference discusses a proposal made by a witness in a House committee. Without considering the proposal on its merits, I hardly think there is any cause for concern over this as yet. Witnesses in Congressional committees can say whatever they like. The fact that they make or advocate proposals in their testimony is not much of a predictor of Congressional action along the lines they recommend. In the article, the Chair of the committee is quoted as saying that the committee will protect the guaranteed retirement accounts of the people. There is no indication that anyone has been moved to accept the proposals by the witness, nor is there any mention of any legislation being introduced to further the proposals' aims. There are many, many steps involved between the introduction of a bill in a committee and the bill's adoption as Federal law. There will be, if any such bill is introduced, many, many opportunities for the public to have input into its form and the possibility of its enactment before it reaches the floor of the House, let alone becomes law. At present, even if the proposal is a bad one, it offers no real threat.

[Rule Of Law]

Change we can believe in should not mean back to the future.

Clinton presided over some of the most critical dismantling of our economic safeguards that led directly to this recession/depression.

Rubin, who helped push through Sandy Weill's dream of the repeal of Glass Steagall, allowing for the first mega-merger of Travelers and Citi, and Greenspan, who told the lenders to get more creative in their loans and fought regulation tooth and nail, and Rahm Emmanuel who championed NAFTA and received the greatest contributions from hedge funds and Wall street of any Congressman while in office, all played roles in this current mess we now need to pay for.

Bush ran up the housing market to churn cash through the system in order to make the GDP look as though there was actual growth there, when in fact it was really record debt and deficits built on a wobbly house of cards. And not one of these men said, "Hey, that's a bad idea.

Change means trying something new. Lets.

[berkeleygirl1962]

Beautifully put! With the exception of Robert Reich, all those Clinton-era faces on the podium Friday were...business as usual.

[Rule Of Law]

Berkeley '72!

[anghiari]

bezerkly girl...no friend of Obama's and a repug troll....lots of time...did you return those clothes for the dva yet?