By Dan Kervick
The Federal Reserve is the central bank of what is still the world’s most important economy, and its Board of Governors is responsible for regulating and stabilizing the financial engine of US capitalism. But to much of the world, that engine now appears to be both poorly designed and overhyped. The global economy has yet to emerge from its most devastating financial failure since the Great Depression. The hub of that radial disaster was Wall Street and the United States, where a combination of botched corporate governance, derelict regulators, open corruption, unhinged greed and sheer, manic stupidity helped run much of the developed world’s economic system into the ground. The economic model that for a brief period during the last two decades of the 20th century struck many as a shiny modern marvel of economic engineering now exhibits the corroded aspect of a shoddy and dangerous lemon hawked by fly-by-night hustlers to a world of ingenuous chumps.
But the United States government is preparing to appoint a new central bank chief, and so it has an opportunity to send the rest of the world an important message about the future direction of the American economy. It can choose to help lead the world toward a new 21st century economic order. Or it can turn backward instead, and again embrace the extremist economic philosophy of the late 20th century that ultimately wrecked the lives of hundreds of millions of people while rewarding a few favored corporate cowboys and glitzy pinstriped gangsters. The United States can begin work on a compelling economic rethink and redesign; or it can sweep failure under the rug, and keep doing what it has been doing for the past few decades. It can keep doing that until the next crash at least.
Lawrence Summers has been identified by almost all independent analysts as one of the key figures in the not-so-dearly departed Greenspan era of deregulation and wild-eyed financial license that created the conditions for the mortgage and derivative-driven financial binge that collapsed in 2007 and 2008. The appointment of Larry Summers to the Fed would send a clear signal to the rest of the world that the United States has decided to turn away from a reckoning with reality, and like some geezer hotdog careening out of the past, is determined to take one last ride in the busted-up 20th century wreck it rode in on. Informed and intellectually responsible observers would see that the US is choosing to double down on its system of big bad banks, weak governance, loose rules, crony capitalism, captured and bought-off regulators and fast-growing inequality. They would read the appointment as an arrogant assertion of power by the US’s declining, but still dangerous, finance-driven plutocracy. A Summers appointment would, no doubt, reassure some of the most successful stakeholders in the existing predatory order, and all those who are still profiting madly from the rackets designed by the financial freebooters of the 90’s and the 00’s. But to the emerging and developing the world, the world of creative and innovative thinkers and social entrepreneurs, the world of young people who still are struggling with the massive unemployment and stagnation caused by the failure of people like Summers, a Summers appointment says the United States has chosen to embrace failure and decadence, and is a fading model of the last century, not a developing model of the emerging one.
Given all the attention that has been devoted to foreign affairs over the past few weeks, many people probably missed the New York Times piece by Joseph Stiglitz, the Nobel Memorial Prize-winning economist, former chief economist at the World Bank, and author of the 2012 book, The Price of Inequality. Stiglitz gives his assessment of Summers, with whom he worked in the Clinton administration … and the sizing-up is absolutely devastating:
The Fed has responsibilities both in regulation and macroeconomic management. Regulatory failures were at the core of America’s crisis. As a Treasury Department official during the Clinton administration, Mr. Summers supported banking deregulation, including the repeal of the Glass-Steagall Act, which was pivotal in America’s financial crisis. His great “achievement” as secretary of the Treasury, from 1999 to 2001, was passage of the law that ensured that derivatives would not be regulated — a decision that helped blow up the financial markets. (Warren E. Buffett was right to call these derivatives “financial weapons of mass financial destruction.” Some of those who were responsible for these key policy mistakes have admitted the fundamental “flaws” in their analyses. Mr. Summers, to my knowledge, has not.)
Regulatory failures have been at the center of previous crises as well. At Treasury in the 1990s, Mr. Summers encouraged countries to quickly liberalize their capital markets, to allow capital to flow in and out without restrictions — indeed insisted that they do so — against the advice of the White House Council of Economic Advisers (which I led from 1995 to 1997), and this more than anything else led to the Asian financial crisis. Few policies or actions have greater culpability for that Asian crisis and the global financial crisis of 2008 than the deregulatory policies that Mr. Summers advocated.
It’s really a sad commentary on the times that Summers, who doesn’t even have central banking experience, is on President Obama’s short list. That he is the leading candidate is a commentary yet sadder. It suggests that Obama has either not read, or has not grasped and assimilated, any part of the mountains of non-partisan expert analysis on the causes of the financial crises he inherited when he was elected in 2008. It also suggests that, in the end, Obama is just an unimaginative party man who turns instinctively to established insider party hacks, even when they are clearly implicated in the failures that he, himself has had to deal with politically and that have marred his presidency. Obama looks like a man of the last century who, like the doomed, bewildered leaders of the old Soviet Union, has settled on yet another retreaded old hand from an addled Politburo.
Cross-posted from Rugged Egalitarianism
OTOH…As much as I hate to say it, Lawrence might provide better hope of fiscal action than Yellen. She still seems to believe QE is stimulative, while he has publicly expressed his doubts. Sort of like the boy who cried wolf, but in this case, it’s the boy who crapped the bed too many times.
P.S. Obama is only a “party man” if you believe the Democratic Party is the Clinton Party. (Not saying you can’t make that case.)
I don’t see how Summers can really do much about the fiscal side, even if he wanted to. Lack of attention to fiscal policy is driven by deep ideological commitments in Congress, the White House and the elite economic establishment to a smaller government and diminished public sector. Summers might not be a big booster of QE, but he is a committed neoliberal who shares the overarching agenda of the free market and small government camp.
Yes, I do think we are effectively now in the fourth term of the Clinton administration. Obama’s appointments have all come out of the Clinton bench.
Are you sure it isn’t the ninth term of the Reagan Administration? The economic and fiscal orthodoxies that still prevail Inside The Beltway haven’t changed much over the past 30 years.
Agree to a great extent, but at the margin, I suspect fiscal policy *could* get more of a spotlight with Lawrence there, for whatever it’s worth. Fed Chair is a hell of a bully pulpit after all. And if Mosler is correct about income-channel effects, the sooner we abandon QE and ZIRP, the better? Maybe? (I’m not totally convinced.) I also make some room for the claim from Lawrence’s corner that he has shifted some of his positions a bit.
And with that said, a shower would feel nice. 😉
Brilliant post once more.
When measuring success or failure of the presidency.. it only matters what the upper .01 percent push for and demand. To do so otherwise a statesman becomes a lame duck politican. Voting in National Elections is a process of validating the existing order. Mainstream Dems and Republicans are more about brand name recognition rather than substantive grass root movement for change. Stiglitz sums up the situation at hand when he states “in the end, Obama is just an unimaginative party man who turns instinctively to established insider party hacks, even when they are clearly implicated in the failures that he, himself has had to deal with politically and that have marred his presidency. Obama looks like a man of the last century who, like the doomed, bewildered leaders of the old Soviet Union, has settled on yet another retreaded old hand from an addled Politburo”
That wasn’t Stiglitz. That was me.
Sorry, Dan, b.o. is unlike you portray, smart as a fox. The fact that so many intellectually lazy “progressive” amerikans, if there exists such a thing, failed to do their due diligence and properly vet the candidate. He was groomed and supported by corporate criminals from the start. As for those “bewildered leaders of the Soviet Union”, Dan, they really lost out when they sold their souls to those good intention-ed, western corporate boys didn’t they? b.o. is the perfect man of the current century; a ruthless, lying, bastard with no conscience. He no more calls the shots than the Soviet leaders did. Know your history!
@ Dan – Thanks, that was great quote
“ingenuous chumps”? Did you mean ignominious chumps or am I missing out on something?
“ingenuous” is OK, no? Naive, right?
You’re right, my bad. I read it as ingenious, dyslexia strikes again.
Perhaps Obama is only interested in setting new records?
US income inequality at record high …..
The top 1% of US earners collected 19.3% of household income, breaking a record previously set in 1927.
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Second round of leaks says it is indeed Summers?
Does seem to me that both Summers and Yellen would be worthless at best. Though certainly Summers would be a nightmare. Great post.
Sorry for the unrelated question but I wanted to post this here where it may be seen and not a much older post, I’ve seen comments made by some MMTers, especially L Randall Wray, about the Bailouts, they $20+trillion spent by the Fed on bailouts and etc and it seems to take a negative view on it. What exactly is the general consensus (or just some opinions) on the bailouts?
Surely, while populist and maybe the “right” thing to do, allowing the banks to fail would’ve had great negative impact on the economy?
Would there have been any way to let the banks fail, but “contain” it? Like the gov takes it over, and kind of controls the sell off/implosion while of course making sure every person lost their job (letting the company fail)? Sorry for the naive questions and maybe bad wording, I am a layman who studied Poli Sci and not economics!
I think it’s time to repost this classic YouTube from Lanny Breuer:
If that doesn’t come through, here’s the link:
“Martin, look at my suit.”
Summer is gone, gone, gone. Obama says:
Nothing quite like self-parody!