Red Flags Fly High on Obama's Economic Team

Top Obama economic advisor Lawrence Summers is the consummate Wall Street, and yes another Clinton insider. His resume reads like a mini telephone book on the list of posts he's held in and out of every financial and government monetary agency imaginable. Any other time, Summers would and probably should be hailed as the apt go to guy for Obama to turn to for help in sorting out some of the economic mess. But Summers' role in helping create some of that economic mess raises one red flag. That role has been lightly talked about. But simply revisiting the part he played in creating some of the havoc doesn't answer the even more compelling question and that's: Does Summers and indeed other Team Obama's economic advisors, all like Summers old Clinton hands, still see the prescription for financial health that they peddled to Bill Clinton as the same prescription for solving this crisis?

Much has already been made about how Bush and the Republicans eagerly cut sweetheart deals with financial industry lobbyists to gut lending and stock trading regulations, winked and nodded at the banks and brokerage houses as they engaged in an orgy of dubious stock swapping, buys, and trading, conned millions of homeowners into taking out catastrophic sub prime loans and watered down the oversight powers of government regulatory agencies.

Summers and Robert Rubin who both served as Clinton's Treasury secretaries lobbied hard Clinton and Congress in the late 1990s to dump most of the provisions of the decades old Glass-Steagall Act. The Act was the 1930s Great Depression era measure that kept federally insured banks out of the go-go world of stock trading, exotic lending and financial speculation. It also set rigid standards for mortgage lending and strict oversight over banking practices.

The rationale for scrapping the Act was that U.S. banks and brokerage houses needed to have the restrictions snatched off to stay competitive with Asian and European bankers and financial traders. President Clinton bought the line. The revision bill passed with bipartisan support in 1999 and Clinton quickly signed it.

But that was only part of the financial deal cutting between the banks and Clinton and Congress. A year later Summers in tandem with then Texas GOP senator and Chair of the Senate Banking Committee Phil Gramm rammed through another "financial modernization" measure. This one took the wraps off government regulations that checked banks, insurance companies and brokerage houses from dumping billions into financial swaps (speculation) on commodities such as oil and food staples. The rationale was the same as that given for getting rid of Glass-Steagall and that was to keep the financial institutions as full profit centers with minimal to no government oversight accountability or investor, depositor and shareholder accountability.

The predictable quickly happened with the regulatory gloves off commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could do whatever they wanted when it came to investing in each others businesses and marching in lock step with each other's financial operations. A buoyant Summers called the revamp of the financial industry as "the legislative foundation of the financial system of the 21st century".

The question that hangs precariously in the air is does Summers still think that the implosion of Wall Street which directly resulted from the terrible policies that he and other Clinton financial gurus orchestrated a decade ago and that has led to so much waste, misery and bickering is a fit model for righting the economic ship today? Democratic House Speaker Nancy Pelosi evidently thinks so. She raised a red flag when she couldn't say enough good things about Summers and other former Clinton officials and the cast of Wall Street connected advisors that Team Obama's has put on public display.

Another red flag is that Obama's key economic players still may not have learned the right lessons from the havoc to the financial markets and damage to consumers the rush to give Wall Street a free rein created is Bill Clinton's reaction to the chaos. He has publicly said that he has no regrets over signing the deregulatory bill.

Still another red flag is the action of Senate Democrats. They helped to kill a bill in 2005 that would have re-imposed some constraints on the financial industry. The reason was the same as before; any limitation would stifle its ability to compete.

The final red flag that Obama's economic players may not be the right antidote for the crisis came from Obama. At his press conference unveiling the players, he assured that his team offered "sound judgment and fresh thinking" to deal with the dire economic peril. Time will tell on that one. But if the past is any predictor of things that can go wrong again, the red flags on Obama's economic team should fly high.

Earl Ofari Hutchinson is an author and political analyst. His forthcoming book is How Obama Won (Middle Passage Press January 2009)

Click here to read more developments and analysis on Obama's cabinet picks

Comments

[Dubois651]

Only time will tell if we are facing more of the same, or real change. Brand Obama looks like Team Clinton. In fact, I wouldn't be surprised if Hilary Clinton was to initiate a coup d'etat while in the Obama cabinet.

Obama is still the President-Elect, so he will receive the benefit of the doubt. However, I am yet to see anything but token change thus far. Finally, Obama has to show good reasoning for supporting all these massive bailouts to corporations while nobody is offering a bailout to the American public.

[johnnycmlately]

Check this out.

http://www.democracynow.org/2008/11/25/naomi_klein_robert_kuttner_and_michael

[canucker]

I share the writers concern over the proposed "change" appointments. People under Clinton did spout this same ideology, as did the republicans, who took it even further.
One example of that is with the SEC's removal, with one 55 minute meeting, of restrictions concerning the "Net Capital Rule."
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http://www.nytimes.com/2008/10/03/business/03sec.html?_r=1

We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008. As rumors swirled that Bear Stearns faced imminent collapse in early March,...How could Mr. Cox have been so wrong?...decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control....the big investment banks...wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr.
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[canucker]

What we are witnessing is the culmination of years of blinkered devotion to modern management philosophy. It is hard right (equally dangerous as hard left) ideology. A neo-conservative thinking in which markets can do no evil, everything must be privatized, and any government regulation is bad.
But just what is it that government is regulating, when it comes to banks and markets? It is human greed. If all government regulation is bad, then by that thinking we should stop regulating human hate and anger. Then it would be alright not just to think violent thoughts, but to state them and incite them and it would be legal to commit murder. The regulation of excessive greed is in basic concept, essentially the allowing of people to make money, without allowing them to steal it from other people or organizations.

Paulie, you're doing a heck of a job
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http://www.bloomberg.com/apps/news?pid=20601109&sid=ar.ByjvMr3YI&refer=home

On Nov. 18, five days before he was forced to bail out Citigroup, Treasury Secretary Henry Paulson told Congress he was handing over to President-elect Barack Obama ``a significantly more stable banking system where the failure of a systemically relevant institution is no longer a pressing concern rattling the markets.''
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[billw8017]

The devil is in the details. One thing to remember about the Clinton administration is that things tended to work out well for the most citizens. His impeachment was a Republican witch hunt. As I never tire of saying, they spent seven years and $70 million, and the worst they could find was that Clinton was a practicing hetersexual. At this late date, the media never tires of referencing Ken Star's contribution to internet pornography. Supposing they got Clinton, and supposing that the prosecution of Gore for making personal calls on his office phone had worked for them, Newt Gingrich would have become President. Now, there is a model of marital fidelity!

After all the good that the Clinton administration delivered, using the same set of laws, the Bush administration has run America over a cliff -- both domestically and internationally. Carter and Clinton used deregulation to shrink government while keeping a judicial eye on the deregulated institutions. Bush used free trade treaties to undercut labor and environmental laws. He winked at off shore banking and tax evasion. He let Enron loot California and called it the free market. He didn't consult with Clinton advisors but stopped the pursuit of al Qaida.

[BLinCincinnati]

"if the past is any predictor of things" you'll be writing yet another "why Obama sucks and how he's doing everything wrong and I know more than he does" post next week.

[kstuff]

Clinton's economists pushed for free trade. They started this mess. Hope they have some different ideas on how to fix it.

[RoloTomassi]

"They started this mess."

Ah...no; you have to go back to the era of Ronnie Raygun to accurately assign that particular label. But no doubt they contributed, and in some key ways.

[leftLibertarian]

How is it 'free trade' when there are conditions under the terms of the agreements?

[LeeScho]

I have never seen a more thoughtful or researched posting by Mr. Hutchinson, and that alone is reason to pay attention. Indeed, the appointees of President-Elect Obama may have learned from their past transgressions, but we at least now know explicitly what those transgressions were and what our level of vigilance should be.

[watereddown]

Summers made mistakes like many in the Clinton universe. But he is sharp and one of the few policy makers who was calling this catastrophe over a year ago . While others were obsessing irrelevantly about inflation he was accurately and presciently warning about the current deflation. He got it early and is a great asset to Obama.

[RoloTomassi]

I agree Earl, and I choose to do the only thing I can do, which is to watch closely and hope that these people have learned their lessons; sadly, even those who have learned [think Jeffery Sachs] don't or simply won't address the ideological issue that lies at the core of their previous thinking and actions.

I understand the concept that perhaps--just maybe-- this is a "wolf in sheeps' clothing" approach, designed to keep the free market fundamentalists in check until it is too late in the day to rally the hardline Fridemanite troops against needed legislation.

Jeez, I really do hope that's the case; a brief infusion of Keynesian antidote that gives way to more free market fundie deregulation going forward [coupled with a failure to reinstate needed regualtions] would be merely a brief reprieve from certain disaster.

[BillZBubb]

What you fail to take into account is the ability of these individuals to learn. Unlike right wing ideologues, Summers et al will look at the situation with an open mind. They now know deregulation was a complete failure. They'll fix it.

[leftLibertarian]

No amount of oversight will prevent corruption and a lack of morals.

[Grissom1001]

Earl
Obama's team seems to be just fine and I have no doubt that they will handle this crisis as best they can...which means that no one will make 100% correct calls all the time. No one.
None of his team are Wall Street people. You reference Summers as one yet he has never worked on Wall Street. Never. Imagine that.

I really hate to see people who will become giddy at the first sign of trouble.