The Summers Of Our Discontent

This is a couple of days old I know, but the following was posted over at Open Left here about the director of the White House Economic Council, Larry Summers…

The Obama administration has helped pull the U.S. economy back from the “abyss” with aggressive efforts to spur growth and stabilize financial markets, (Summers) said on Monday…

…”Thanks largely to the Recovery Act, alongside an aggressive financial stabilization plan and a program to keep responsible homeowners in their homes, we have walked a substantial distance back from the economic abyss and are on the path toward economic recovery,” Summers wrote to House Republican leader John Boehner.

Of course, this was a response to Representative Man Tan’s repeated childish assertions (including here) that the “stim” hasn’t accomplished anything of benefit to our economy, which is 1) patently untrue, and 2) a laughable criticism from the leader of the party in the House that preoccupied itself with “values” issues, rewarding its most moneyed pals with tax cuts and waging war without end that led us to the edge of the precipice.

This comes on the heels of Ryan Lizza’s recent portrayal of Summers in The New Yorker, in which we learn, among other things, the following from Lizza…

Summers told me that, as a graduate student, he first studied claims, made famous by economists at the University of Chicago, that financial markets are always rational and self-correcting. He said, “I encountered a sentence that was much quoted: ‘The efficient-market hypothesis is the best established fact in social sciences.’ Any sentence like that is a red flag to an ambitious academic.” Summers produced a body of work that undermined the efficient-market hypothesis, or E.M.H. A memorable paper on the subject, which he wrote in the early eighties but never published, began, “THERE ARE IDIOTS. Look around.” According to Justin Fox’s recent book, “The Myth of the Rational Market,” that paper persuaded Fischer Black, one of the leading theorists of E.M.H., to essentially abandon his belief in the hypothesis.

In 1982, (Martin Feldstein, Summers’ most influential mentor) was named the chairman of Ronald Reagan’s Council of Economic Advisers, and Summers followed him to Washington. Feldstein had been hired to add intellectual heft to the Reagan White House, and he had no qualms about publicly challenging Reagan’s more extreme supply-side advisers. His concerns about rising deficits and his calls for raising taxes made him a hero to congressional Democrats. Reagan’s Treasury Secretary, Donald Regan, told Congress that Feldstein had learned everything from libraries rather than from the real world and that the members could just throw away his annual economic report. Feldstein was marginalized, and returned to Harvard in 1984. (After the experience, Reagan threatened to abolish the C.E.A.) Feldstein’s truthtelling greatly affected Summers, and his own research became more focussed on battling economists, like Reagan’s supply-siders, whose work, as he saw it, was grounded in abstractions and wishful thinking. He wrote, “No small part of our current economic difficulties can be traced to ignorant zealots who gained influence by providing answers to questions that others labeled as meaningless or difficult. Sound theory based on evidence is surely our best protection against such quackery.”

Even though Feldstein was a conservative, I still find it a bit appalling that Summers would end up essentially adhering to right-wing dogma, agreeing with the “quackery” of favoring tax cuts as a primary stimulus in his current role.

Lizza’s article also tells us the following on the origin of the American Recovery and Reinvestment Act, otherwise known as the “stimulus”…

There were sound arguments why (a) $1.2-trillion figure was too high. First, (Chief of Staff Rahm) Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” (Senior Advisor David) Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”

There was also a mechanical argument against a stimulus of that size. (Obama OMB Director) Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future.

Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.

When the meeting broke up, after four hours of discussion, interrupted only briefly when the President brought out a cake and led the group in singing “Happy Birthday” to Orszag, there was still indecision about how big a stimulus Obama would recommend to Congress. Summers, (Council of Economic Advisers Chair Christina) Romer, (Treasury Secretary Tim) Geithner, Orszag, Emanuel, and (Deputy Director of the National Economic Council) Jason Furman huddled in the corner to lock down the number. Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars.

And as far as what to do about the toxic assets on the balance sheets of the most vulnerable banks, Lizza tells us the following…

On Sunday, March 15th, Geithner was summoned to the White House for a meeting with the President and his senior aides about whether Obama should adjust Geithner’s plan—or scrap it and come up with something else. Geithner did not go unprepared: he brought with him his advisers Lee Sachs and Gene Sperling, who ran the N.E.C. during the Clinton Administration, and six other staffers. Geithner had a line he often used that summed up how he and his colleagues at Treasury would prevail: “Plan beats no plan.” The meeting lasted seven hours. Obama’s advisers were so divided that he left them in the Roosevelt Room after the first two hours, saying, “You guys work this out, and when I come back I want you to tell me what your agreed-upon approach is.”

Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”

Summers played the role of “the ultimate murder board,” according to Sperling, making the Treasury officials defend their ideas the way a Ph.D. student must defend a dissertation. He challenged and provoked Geithner to make sure that he had thought through every aspect of the plan. They argued back and forth, as they had done in the Clinton Administration, and their intensity was often jarring to the other Obama advisers. Summers didn’t trust the regulators, and was particularly worried about whether the stress tests designed by them were sufficiently tough on the banks. He pointed out that, in the days before Lehman, Bear Stearns, and Washington Mutual crashed, the same regulators had said that capital at those institutions was more than adequate.

In the end, though, Summers acknowledged that there were no better options, and Geithner’s plan survived intact. On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.

The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)

I grudgingly have to give Summers a bit of credit for realizing the potential market shock of nationalizing our most vulnerable banks, though how that differs from the de factor public ownership of these institutions by virtue of the infusion of TARP funds is something which escapes me.

I will also acknowledge Summers’ vast knowledge in economic theory and practice as well as public policy, which, despite what I consider his “too cautious by more than half” approach, has served Obama well.

However, as noted here, Summers has favored reduction of capital gains taxes as opposed to infrastructure investment as a financial stimulus (even though he quite rightly opposed tax cuts favored by congressional Republicans in 1999). Summers is also a product of the “revolving door” between both the Dubya and Obama treasury departments (with both Geithner and his predecessor Henry Paulson, as well as Sachs and Sperling, having worked at Goldman Sachs; Summers earned $5 million from the hedge fund D. E. Shaw, and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money, as Wikipedia tells us).

Oh, and for the record, let it be known that Summers is the guy who told Chris Dodd to remove caps on executive pay for firms receiving TARP funds, including Bank of America and Citigroup (I’ll be polite and use their proper names). I would ask that you keep this in mind if, God forbid, Dodd actually loses his Senate campaign to “teabagger” sympathizer Rob Simmons next year (here), as a result of the drip-drip-drip of negative Dodd press out there more than anything else.

(Also, I’m not even going to get into Summers’ run-in with Dr. Cornel West, the so-called “toxic” memo about the theory of dumping waste in third-world countries, and perhaps his most notorious moment, which would be the speech about “women’s representation in tenured positions in the sciences” he gave while president of Harvard, which Froma Harrop commented on here.)

Instead, I’ll leave you with the following from Ian Welsh of Open Left (and the bad word is his, not mine, though it’s apropos)…

All (Summers, Geithner, and the rest of the Obama economic team) did was throw cash at the problem, without dealing with the underlying issues, which is why they didn’t manage (as Jerome points out) to kickstart ANY net private spending. They didn’t break up major banks. They didn’t allow bankruptcy judges to rewrite mortgages. Their mortgage program kept hardly anyone in the house. And their money for financial firms did not increase lending by one cent.

So, as a Stirling Newberry likes to say “the economy breathes fine, as long as we don’t unplug the life support machines”.

That’s all they did - throw the economy on life support by hooking it up to a money spigot, then wander off and have a cup of coffee and tell each other how brilliant they were, not noticing that they hadn’t actually cured the patient.

This is going to be the (worst) “recovery” of your lifetime, unless you’re in the financial sector at a relatively high level. Bank profits have recovered but ordinary people are not, in a generation, going to see a full recovery from this clusterfuck - employment will not recover to pre-recession levels before the next recession, and I don’t expect it to recover after that recession either.

At this point, in fact, I am expecting this to turn into a double dip recession—this “recovery” will not have any significant legs.

Anyone who believes (Summers) when he pats himself on his back should remember that Summers record of being wrong about everything of significance is awe inspiring in its completeness. This is the man who helped create the necessary preconditions for the financial crisis through radical deregulation of financial markets, then didn’t see the crisis coming till it was already well underway.

Oh, and one reason any peaceniks reading this kiss any chance of the Afghan war ending is that Obama needs the war stimulus to keep the economy on life support and military Keynesianism is the type of stimulus Republicans and Blue Dogs won’t vote against.

Welcome to endless war, money for rich people, and trickle down for you. The future looks an awful lot like the past, doesn’t it?

In Ryan Lizza’s fine New Yorker article, he tells us that, as a young boy, Summers’s parents would “often gave Larry a math problem to work on (when they went out for the evening). If they forgot, his mother has recalled, he would rush out the door after them and demand one. According to (Summers’s uncle and fellow noted economist Kenneth) Arrow, Summers’s father taught him statistical methods from an early age, and in the sixth grade Larry created an analysis of baseball games that attempted to predict the probability of a team’s performance at the end of the season based on its position in the standings on the Fourth of July.”

Well, this being October 15, 2009, I’d like to see Summers perform this little exercise again and seriously attempt to predict where we will be economically approximately a year and a month from now, as well as three years and a month from now. If our Democratic congressional majorities end up evaporating because of his refusal to fight for the fundamental reform we so sorely need (and in the process, admit his own culpability for the institutional rot that seeped in during the late '90s while he served under President Clinton), to say nothing of a loss of the White House, I would like to have a little advanced notice.

Update 10/17/09: "Annals of rank hubris" indeed here (h/t Atrios).

Update 7/24/13: VIOLATION!...(just kidding - have at it :-).