Part X: Salvation by Larry and Tim
“Through Palin, it seemed as if the dark spirits that had long been lurking on the edges of the modern Republican Party – xenophobia, anti-intellectualism, paranoid conspiracy theories, and antipathy to Black and brown folks – were finding their way to centre stage.” (195) By the end of Obama’s second term, they took over centre stage with the election of Donald Trump, culminating in the highly theatrical, but foolish and dangerous tilting at windmills during the final days of the deplorable Donald Trump presidency. The insurrection ignored the enormous power of the investigative and security services of the state and left the legislative powers in place after a very destructive interruption. The insurrectionists, posing for the TV cameras and taking selfies to allow their own criminality to be documented, ended up turning protest into a demonstration of impotent mob violence, but also political farce on a most dangerous scale on the largest theatrical stage.
Twelve years earlier, instead of the COVID-19 crisis, in the economic recession and the political fiasco on the federal level – all interconnected – the economic drama was far worse, but at least a peaceful political transition had been underway and one in a thousand Americans were not dying. “With over half of America’s twenty-five financial institutions having either failed, merged, or restructured to avoid bankruptcy during the previous year, what had begun as a crisis on Wall Street had now thoroughly infected the broader economy.” (235) The infection was not a virus but a collapse of faith in the future.
“The stock market had lost 40 percent of its value. There were foreclosure filings on 2.3 million homes. Household wealth had dropped 16 percent…more than five times the percentage loss that occurred in the aftermath of the 1920 market crash. All this on top of an economy that was already suffering from persistently high levels of poverty, a decline in the share of the working-age men who were actually working, a fall in productivity growth and lagging median wages.” (238)
Obama asked, “what would happen when change didn’t come fast enough?” He should have asked what would happen if there was no real change at all, especially in the fundamentals? When he did ask that question, this was his answer. “The thought nags at me. And yet even if it were possible for me to go back in time and get a do over, I can’t say that I would have made different choices.” (305) Why not? Because, as he himself says, he “was a reformer, conservative in temperament if not in vision.”
Why did not a person of such enormous intelligence, charm, sociability, deep concern for the wellbeing of Americans, and highly skilled in both prose and rhetoric, not wrestle with the fractured foundations of the American polity in a far more effective way? Why, whatever the enormous successes on the surface, did the forty-fourth president of the United States fail in dealing with the enormous foreign affairs crises, the international economic crisis, and the climate change crisis in a way that would re-establish America on new stronger foundations rather than lead to a backlash and victory of the Restorationists who wanted America to travel backwards and make America Great Again instead of traveling forwards to make America even greater?
Hence, the even larger irony than the one implied when he quoted his predecessor. “The good news, Barack, is that by the time you take office, we’ll have taken care of the really tough stuff for you. You’ll be able to start with a clean slate.” (207) He not only inherited a filthy slate, he also inherited a dirty rag to rub it clean. This propelled Obama into a course of action that would indeed save the economy, but at far too great a cost to the society and politics of the country.
“When it came to assembling my economic team, I decided to favor experience over fresh talent. The circumstances, I felt demanded it.” (211) My smart-alecky mental thought was to add – “you should have thought more and felt less and recognized that the circumstances did not demand reinforcing the existing system but using the opportunity of the crisis to reset its foundations.”
“I loved the various up-and-comers who’d advised me throughout the campaign and felt a kinship with left-leaning economists and activists who saw the current crisis as the result of a bloated and out-of-control financial system in dire need of reform. But with the world economy in free fall, my number one task wasn’t remaking the economic order. It was preventing further disaster.” (211) In fact, it only postponed further disaster. Caught up in the false dichotomy between corrective surgery and a total transplant, he did not see that much simpler solutions were on offer which would have enhanced the positions of both the poor and the middle class while strengthening the financial system by saving the lives and livelihoods of their customers.
Obama appointed Larry Summers Secretary of the National Economic Council, a surprise since the job required coordination, and diplomacy, not exactly Larry’s forté. An American economist and the Charles W. Eliot University Professor and President Emeritus of Harvard University, he was the former Vice President of Development Economics and Chief Economist of the World Bank (1991–93), became senior U.S. Treasury Department official and eventually Treasury Secretary (1999-2001) under President Clinton and became director of the National Economic Council for President Obama (2009–2010). America was facing a financial crisis.
Larry back in the nineties led an international response to the currency crises in Mexico and Russia, Brazil and Japan. A brilliant, talented and accomplished guy, no? Yes. He was an economic star on both the domestic and international scene. President Obama had once declared, “I will always be grateful that at a time of great peril for our country, a man of Larry’s brilliance, experience and judgment was willing to answer the call and lead our economic team.” But immediately after the announcement, Obama learned that, “Larry had been a strong advocate of deregulation of financial markets.”
Larry was basically a neo-liberal on the ground level in economics, fusing a microeconomic “laissez faire” approach to macroeconomic activism. “Markets should allocate capital, labour and ideas without interference, but sometimes markets go haywire, and must be counteracted forcefully by government.” In other words, do not interfere unless you have to intervene. While I agree on the ground game, I believe in the government intervening very actively on the grand level as a continuous and tough regulator, the activities of which are not restricted to crises, and as an active investor in human and technical capital rather than as a subsidizing agency. In fact, when Summers was president at Harvard, he used Harvard’s wealth precisely in this way to foster equity. Why did he not do this in 2009 for the American economy? The problem was not just his lack of tact and restraint or his obliviousness to other persons, but his contradictory economic philosophies.
He enunciated this economic philosophy in a speech in 2009. (Cf. The Baseline Scenario https://baselinescenario.com/2009/04/27/larry-summers-new-model/)
- All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only “three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.
- We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago. It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.”
- There is a critical need to support financial intermediation and to ensure it is adequately capitalized, with a view to the risks inherent in the current situation.
- Growth in the 1990s and more recently was based too much on finance. (Hence, Obama’s comment about the over-bloated economy.) The high and rising share of finance in corporate profits “should have been a warning”. The next expansion should be based less on asset bubbles and more on investment in key public services.
- The financial regulatory system “in fundamental respects has been a failure”. There have been too many serious crises in the past 20 years (this statement was somewhat at odds with the low frequency of major crises statement in point 1).
I call this Crisis Capitalism Economic Theory. Instead of seeing the need to expand credit availability in an expanding universe, the premise is a self-equilibrating universe. Instead of the problem focused on “overpowering,” the expansion of credit should be applauded, but it has to be partnered with regulation so that the expansion does not run amuck. The first and primary focus should not have been on providing support for the financial intermediaries but for the end users which would in turn have reinforced the stability of the financial intermediaries. “Asset bubble” in this case is a reference to too much credit being available to those who should not have it believing it detracts from the amount available in public services. But public services should be regarded as an absolutely necessary capital investment along with intellectual and technological capital which all require a steadily increasing expansion of credit. Sommers basis his work on a steady state instead of an expanding universe. The real issue is to ensure that the expansion is steady and neither explosive on the one hand nor stalled on the other hand.
Tim Geithner was Obama’s other key economic appointee, his Treasury Secretary and known as “the indispensable one” and opposite to Larry Summers with his poise, and soft-spoken equanimity, but a critical complement who added “quiet confidence and intellectual rigour,” “a basic integrity, a steadiness of temperament and an ability to problem solve” to Larry’s economic leadership. It is clear from Obama’s account that he chose both men based on an economic ideology that he failed to probe, but even more for the personalities of both men.
When Geithner was still President of the Federal Reserve Bank of New York, he helped manage restructure Bear Stearns and the AIG as well as wind up Lehman Brothers, As Treasury Secretary, he oversaw the distribution of $350 billion under TARP, the Troubled Asset Relief Program created by the Bush administration. He helped restructure the regulation of the country’s financial system and reinvigorate the mortgage market as well as rescue the auto industry. However, he totally neglected the small homeowners who lost their homes. The following sums it up: “In his book Bailout: How Washington Abandoned Main Street While Rescuing Wall Street, Neil Barofsky[1] argues that Geithner never had the intention to utilize the Home Affordable Modification Program as intended by Congress. Instead of providing relief for homeowners to avoid foreclosures, it was Geithner’s plan that the bank should proceed with these foreclosures. Geithner said that he ‘estimates’ that the banks ‘can handle ten million foreclosures, over time’, and that HAMP ‘will help foam the runway for them’ by ‘keeping the full flush of foreclosures from hitting the financial system all at the same time.’ As such, ‘banks participating in the program have rejected four million borrowers’ requests for help, or 72 percent of their applications[2], since the process began.’ Citimortgage and JPMorgan Chase were among the banks that refused the most HAMP claims. As such, the program only helped 887,001 people out of the over 4 Million people that were originally estimated to be able to benefit from the program.” In fact, the estimated number of households affected in the end was about six million and less that 1 in 5 were helped.
Why? Because you get the economic philosophies of those you hire or appoint, especially when you lack even an acquaintance with economic theory.
Next: XI: An Economic Alternative
[1] Barofsky, Neil M. (2012). Bailout: an inside account of how Washington abandoned Main Street while rescuing Wall Street. New York: Free Press.
2 “Banks reject 72% of applicants under HAMP program,”.The Real Deal Miami. 2015-08-09.
Howard Adelman 