Larry Summers: ARRA Was Too Small

Reporting from the Institute for New Economic Thinking's weekend conference in Bretton Woods, New Hampshire, Robert Kuttner of the American Prospect offers this tidbit:

Larry Summers, now back at Harvard, was the after-dinner entertainment, interviewed by the prodigious Martin Wolf of the Financial Times, the world’s most respected financial journalist.

Summers was terrific, acknowledging that the stimulus of February 2009 was too small, that the idea of deflating our way to recovery is insane, that de-regulation had been excessive, and that much of the economics profession missed the developing crisis because its infatuation with self-correcting markets.

If only this man had been Obama’s chief economic adviser!

It reminded me a bit of Eisenhower’s farewell address, warning of a military-industrial complex, or Citizen Jimmy Carter’s sublime post-presidency. Why do these people find their consciences and souls after they give up power?

If Larry Summers was the after-dinner entertainment, let's hope the guests found Alka-Seltzer tablets instead of mints on their pillows when they returned to their hotel rooms for the night. I suppose we should be relieved that Summers has found his Keynesian religion, but it wasn't as if his $787 billion fiscal stimulus number wasn't criticized at the time for being too small. 

Certainly, economists such as Joseph Stiglitz, Paul Krugman and Dean Baker all thought the number too small. So did Congressman David Obey who first put together a $1.4 trillion package and then a $1.2 billion package only to be told to pare the numbers further. And inside the White House, Christina Romer argued for a bigger fiscal stimulus making the case that long-term unemployment posed a threat to the economy. They were all outweighed by a political calculus.

Ultimately Barack Obama, and not Larry Summers, bears responsibility for that decision. And it's a lesson, he still doesn't seem to quite mastered as yet. Back on February 9, 2009, Paul Krugman wrote this in his New York Times column:

I blame President Obama’s belief that he can transcend the partisan divide — a belief that warped his economic strategy.

After all, many people expected Mr. Obama to come out with a really strong stimulus plan, reflecting both the economy’s dire straits and his own electoral mandate.

Instead, however, he offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support, and believed that it would. Not long ago administration strategists were talking about getting 80 or more votes in the Senate.

Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate, waiting until late last week before finally saying what needed to be said — that increasing spending is the whole point of the plan.

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan, which was, by the way, better focused than the original administration proposal.

In the Senate, Republicans inveighed against “pork” — although the wasteful spending they claimed to have identified (much of it was fully justified) was a trivial share of the bill’s total. And they decried the bill’s cost — even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, that’s right, $3 trillion in tax cuts over 10 years.

So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh — not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.

Such are the perils of negotiating with yourself.

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Why Does Barack Obama Love the Establishment So Much?

These are hopeful days. The four horsemen of the establishment look like they are leaving the White House. Peter Orszag, who apparently was the most conservative of them all (and who just lobbied for more tax cuts for the rich), has left his position as head of the Office of Management and Budget. Larry Summers is leaving his position as director of National Economic Council. Rahm Emanuel might be out by October. And Tim Geithner is also rumored to be leaving after the election.

There are hardly four Democrats in the whole country who were more pro-establishment, anti-change, pro-corporate power, pro-Wall Street than those four. I'm being literal. Bob Rubin might break into the top four, maybe Evan Bayh, maybe Harold Ford, Jr. But the four that are leaving the White House are undoubtedly in the top ten most corporate friendly Democrats in the country.

So, that leads to the question of why did Obama pick them in the first place? Why did the guy who promised to change the whole system bring in the guys who are most wedded to the system? Why does Barack Obama love the establishment so much?

This is no longer an academic question. In the words of President Obama, I don't want to look backward, I want to look forward. This is the time for hope. So, all of these guys are leaving and I am perfectly happy to let bygones be bygones. The real question is -- who is going to replace them?

Unfortunately, so far the answers aren't good. Jacob Lew has been nominated to be the head of the OMB. During his Senate hearings he said this about deregulation:

"[T]he problems in the financial industry preceded deregulation ... [I] personally [don't] know the extent to which deregulation drove it, but I don't believe that deregulation was the proximate cause."

That's crazy. Saying deregulation was not the proximate cause of the economic crash is like saying if you jump out of a building gravity will not be the proximate cause of your death. I've had many Republicans on our show that have admitted deregulating the banks so they could take enormous risk was not a good idea. Lew's position is beyond Republican.

Some might think that Lew is motivated to take that position by his former (and possible future) employer, Citigroup. They paid him millions of dollars when he was an executive there, including a $950,000 bonus after Citigroup got bailed out by taxpayer money. But I don't think Lew is driven by personal greed (though I don't know the man, I'm just giving him the benefit of the doubt). I think he is the product of his context. He lives in the Washington/Wall Street bubble. And inside that bubble, everybody gets rich off of deregulation and it makes perfect sense to them.

So, why does Obama keep insisting on hiring within that bubble? Now, we hear that Summers replacement is likely to be a corporate executive because Obama feels he has been criticized for being anti-business. That is unreal. How easy is this guy to manipulate? Or does he want to be manipulated in that direction?

Who is calling Obama anti-business? The same Wall Street guys who robbed us of billions (some would argue trillions) and want to do it again. Why on God's green earth would you continue to listen to those guys?

Yes, they have some lackeys in the establishment press, too. I'm sure Mark Halperin would write a blistering article if Obama dared to pick an actual progressive to fill any of these positions. But my God man, why in the world would you give a damn what Mark Halperin and his DC buddies think?

You're losing the whole American population while trying to cater to these clowns. Get your head out of ... the DC/NY bubble. The rest of the country doesn't think you're too tough on business; they think you haven't done enough to help them -- the middle class.

So, I ask this as an earnest question -- why is Barack Obama obsessed with appeasing the establishment? Was he being completely disingenuous when he ran on change? How could he possibly have thought that Larry Summers or the corporate executive who might replace him would bring us real change?

Look, I ask all of this not to complain or because I am part of the so-called "professional left" but because it matters to the very important decisions he is about to make.

For example, if he picked Howard Dean to replace Rahm Emanuel as his chief of staff, we would all know we were going in the right direction. Not because Dean is a panacea, but because it would mean that Obama is getting serious about change and taking on the power establishment.

You know Dean would stand up for the middle class. You know all of the political pundits in DC would hate him. Now, does anyone think Obama has the courage to defy Washington conventional wisdom and appoint Dean? That's what I thought. Even if you love Obama with all of your heart, you know he'd never have the guts to pick Dean. That would make Washington and New York very angry with him. And he hates that. He has to be loved by those guys. They're the ones in his bubble.

I ask all of these questions because I am desperate to figure out how we can get President Obama to deliver on the change he promised so we can finally deliver for the middle class in this country instead of the wealthy and powerful that surround the president in Washington. What makes him tick? How can we get him to fall out of love with the establishment? How can we get him to have the courage to govern like he ran for office -- with passion and conviction to help all of us instead of the Washington power elite?

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Is Larry Summers on the way out?

Joshua Green thinks so:

I think Summers is going to leave sooner rather than later, possibly before the mid-term elections, and if not then, soon afterward.

Why? Because Summers is frustrated by his role, and his colleagues are clearly frustrated with him. Alexis Simendinger had a devastating item in last week's National Journal suggesting that Summers's "legendary self-regard" and "ego the size of the national debt" had gotten out of control. Some of Summers's frustration no doubt stems from his wanting to be Treasury secretary. When that plum went to Geithner, Summers cast his eye on the Fed chairmanship and agreed to bide his time until Ben Bernanke's term ended at the NEC--a staff position well below his old job as Clinton's Treasury secretary. Most administration officials tactfully avoid pointing this out, because Summers has a fragile ego. But that's why Joe Biden is so great. "How many former Secretaries of the Treasury would come in not as Secretary of the Treasury?" Biden blurted out to the New Yorker's Ryan Lizza last fall.

But Summers didn't get the Fed job either. Apparently that didn't sit well. Administration insiders told Simendinger that Summers demanded a series of perks as compensation, including cabinet status, golf dates with the president, and a personal car and driver. In the "No Drama" Obama administration, such behavior stands out. [...]

Summers always seemed a bad fit for NEC director because the job entails dispassionately presenting the president with the counsel of his competing economic advisers. Summers doesn't do "dispassionate" and he didn't want to limit himself to fielding others' advice--he had plenty of his own to offer. In other words, he was supposed to be the referee, but he also wanted to play power forward.

Summers was one of President Obama's worst appointments, in my opinion, but I wouldn't expect the president to reshuffle his economic team unless a mostly-jobless recovery continues, or the worst-case scenario of a douple-dip recession develops. Anyway, Summers' departure wouldn't make much difference if Green is right about Timothy Geithner being "ever more secure at Treasury."

What do you think?

House Populists pushing Wall Street transaction fee bill

Members of the House Populist Caucus held a press conference on Thursday to endorse a bill that would "assess a small fee on Wall Street day traders to pay down the national deficit and invest in America's middle class families." From a press release issued by Populist Caucus Chairman Bruce Braley (IA-01):

"Our nation continues to be crippled by a struggling economy which has resulted in an astronomical unemployment rate of 10.2 percent," [Representative Peter] DeFazio [OR-04] said.  "The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets.  This legislation will force Wall Street to do their part and put people displaced by that crisis back to work." [...]

The legislation will assess a small securities fee on the following transactions:
·         Stock transactions (tax rate will be 1/4 of 1 percent--0.25%),
·         Futures contracts to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (tax rate will be 0.02%),
·         Swaps between two firms on certain benefits of one party's financial instrument for those of the other party's financial instrument (tax rate will be 0.02%)
·         Credit default swaps where a contract is swapped through a series of payments in exchange for a payoff if a credit instrument (typically a bond or loan) goes into default (fails to pay) (tax rate will be 0.02%),
·         And options, which are contracts between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or to sell a particular asset on or before the option's expiration time, at an agreed price (at the rate of the underlying asset).

To ensure the tax is appropriately targeted to speculators and has no impact on the average investor and pension funds, the tax will be refunded for:

1)      tax-favored retirement accounts,

  1.      education savings accounts,
  2.      health savings accounts,
  3.      mutual funds and,
  4.      the first $100,000 of transactions annually that are not already exempted.

Braley spokeswoman Caitlin Legacki told me that as of this morning, the bill has 21 co-sponsors, 14 of whom belong to the Populist Caucus.

The bill has at least one champion in the Senate. HELP Committee Chairman Tom Harkin appeared with Populist Caucus members at yesterday's press conference. I don't know whether any Democrat on the Senate Finance Committee is willing to push for this measure.

I haven't seen any reaction yet from the Obama administration. Supporting this bill should be an easy call, but my hunch is that Treasury Secretary Timothy Geithner and senior presidential adviser Larry Summers will have Wall Street's back on this one. Here's hoping I am wrong about that.

There's more...

A Dump Geithner Movement Growing

The Hill reports that there is a "growing consensus" among the Congressional Progressive Caucus that Treasury Secretary Timothy Geithner should step aside.

Rep. Peter DeFazio (D-Ore.) said Wednesday that he and other liberal House members are becoming increasingly tired of Obama administration economic policies that they say are too focused on maintaining the stability of Wall Street firms and largely ignore "Main Street."

"A growing consensus in the caucus [believe that Geithner should be removed]," DeFazio said on MSNBC this evening, adding that some lawmakers are "considering questions regarding him and other economic advisers."

DeFazio said that lawmakers have not yet drafted a plan to remove Geithner. The lawmaker also took aim at top Obama economic adviser Larry Summers for furthering many of the same policies favored by Geithner.

"We need a new economic team," said DeFazio.

The veteran congressman specifically mentioned last year's bank bailouts and the Geithner's handling of the collapse of insurance giant AIG. At the time, Geithner was head of the New York Fed in the Bush administration.

"We may have to sacrifice just two more jobs to get millions back for Americans," the congressman added.

As Treasury Secretary, Geithner is clearly not up to the task. The report from TARP inspector general Neil Barofsky that details how the New York Fed, then headed by the Geithner, failed to stand up for taxpayers and folded its hand agreeing that AIG's creditors should be paid 100 cents on the dollar for financial instruments worth a fraction of their value. But rather than negotiate and offer to cover fifty or seventy-five percent of policy value, Geithner simply acquiesced.

Appearing on Tuesday on Capitol Hill, Secretary Geithner bemoaned that "the most important thing to understand about this - and this was a tragic failure of our country - is that we came into this crisis without the basic set of tools we needed to contain the damage caused by hugely costly mistakes in parts of our financial system."

Sadly the failure is also yours. In a response to a question by Congressman Ron Paul of Texas earlier this summer demonstrated how oblivious he is to his duties, Geithner demurred that he had never been "a regulator." He's half right. As head of the New York Federal Reserve he had oversight responsibility but he failed to act.

That was then, this is now. Thirteen months after the collapse of Lehman Brothers and the collapse of the financial industry, the United States has yet to adopt any legislation to change the way it oversees or regulates financial industries. What's he waiting for? Another meltdown?

It's time for Secretary Geithner to step aside.

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