The good news: Summers is gone Jan 1 (no word yet on Geithner).
The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies.
To review: Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the financial crisis. In addition to believing all of the usual foolishness about efficient markets, he bought into the radical deregulation arguments pushed by the free market absolutists.
Summers was the Treasury Secretary when Glass Steagall was repealed. Instead of speaking out against the irresponsible Gramm"“Leach"“Bliley Act (Financial Services Modernization Act of 1999) that allowed the Financialization of America to progress, he actively supported it. Instead of explaining to the public how Glass Steagall had prevented every Wall Street crisis since the Great Depression from spilling over onto Main Street, he rolled over for Citibank.
Understand that the repeal of Glass Steagall was not a cause of the crisis. But, it allowed the net damage to be far greater and extend far wider than it would have otherwise been. From a libertarian perspective, it was emblematic of the corporate takeover of the legislative process. For a hefty fee (aka campaign donation) you could pretty much write the regulations that covered your own industry. How could that ever go wrong?
Summers oversaw the passage of the even more ruinous Commodities Futures Modernization Act of 2000. The CFMA exempted all financial derivatives from any and all regulatory oversight. The CFMA not made the AIG collapse possible, it made it highly likely. It helped to set up both the Lehman and Bear Stearns’ collapses. The CFMA allowed AIG FP to write over $3 trillion in derivatives, reserving precisely zero dollars in case these insurance policy-like obligations had to be paid out.
Failing upwards: When Obama appointment the Rubin duo of Summers and Geithner, it a perverse reward for a job done poorly. The two were creatures of the banking system, and were unlikely to do anything that threatened the existing order. Even worse, it created a dynamic where the new administration was committed to defending the policies that helped to contribute to the crisis in the first place. Instead of To Hell with the Banks, Save the Banking System, we got the exact reverse. This was Rubin’s lasting gift to the Obama White House: A third term for George W. Bush’s economic policies. When Obama becomes a one-termer, it will be his own fault for following this horrific economic advice.
Summers was incapable of saying, let’s repeal the Glass Steagall Repeal; lets overturn CFMA. Rather than fix what was broken, he stayed committed to the same bad ideas that led to crisis and collapse. Most humans have a hard time saying: “My bad, let’s just reverse the error and start over.” By putting into senior positions the people who helped create the mess, we ended up with a defense of the decision making that proceeded, instead of a fresh approach. Summers was a defender of the status quo. This was not change we could believe in — it was simply more of the same.
The Bush administration gave us the bailouts of Bear Stearns, Fannie & Frediie, AIG, Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, Goldmasn Sachs, et. al. The hope that a new White House would change the course was quickly dashed by the new old Economic team. Obama lacked the will or the understanding or the nerve to break with those Bush policies. That was his ultimate error. Instead of imprinting the failures of the prior administration on his predecessor, instead of making Bush own what he in fact did, Obama wrongly adopted them. Thus, he made the bailouts in large part his own. Huge mistake — and one that was inevitable with Summers large and in charge of White House Economic policy.
The Obama White House correctly forced the insolvent automakers into bankruptcy reorganization. They should have done the same with the insolvent banks and investment firms. That was impossible with the banker’s boys running the White House economic policy: The Rubin/Summers/Geithner team made sure that did not happen.
As Allan Meltzer stated, “Capitalism without failure is like religion without sin"”it just doesn’t work.” The change people voted for never appeared, and the Summers led economic team gave us two more years of Bush bailout policies. For that humongous error, his departure is a welcome change.
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UPDATE: September 22, 2010 10:34am
To put this into context of Wall Street:
Whenever a new portfolio manager takes over an older, under-performing fund, the first thing he does is jettison all of his predessor’s mistakes. Why own the prior manager’s problems? If you decide these names are attractive at a later date, well then, he can own them on his own terms, metrics, methods, etc.
But if you were to put the original manager back in charge, he will not be able to disown those prior errors. His cognitive biases are likely to prevent him from acknowledging the same problems he created. This is why project leaders are removed, military commanders get relieved, CEOs get fired. A clean sweep is all but impossible with the prior management. This is human nature.
Worthy of a Harvard seminar BR! Hope they give you a ring to book a speaking engagement regarding their soon-to-return DC insider/boomerang. I wonder whether Summers will hook Harvard up with another $1.8 trillion dollars worth of risky investments for it’s endowment fund (afterall, the place is still standing)??? http://www.boston.com/news/local/massachusetts/articles/2009/11/29/harvard_ignored_warnings_about_investments/?page=1
excellent post-
Obama could have (and should have) made some bold moves regarding the banks- but delegated (Reagan anyone?) the decisions on that to those who were supposedly the experts-
colossal blunder- (much like starting a land war in Asia)
BR, have you ever thought about entering the political arena? I truly believe that you would be a great choice to take someone like Summers place. Yea, your probably too outside Washington politics to even be considered.
Its a shame that the majority of the public is ignorant on the basics of economics to understand what the repeal of Glass-Steagall and the passage of the Commodities Futures Modernization Act setting the stage for what has happened since then.
Most still attempt to whittle it down to the same “higher taxes, big government” or “lower taxes, less government” rhetoric.
Maybe a change will do some good in the long run. Only time will tell. I bet Geithner is gone by the end of the year.
I was driving home last night and heard something on NPR that almost made me veer off the road – maybe somebody could help me with this. Something about him going back to Harvard to teach, and one of the subjects would be, I swear I heard this, really, ……….. How government spending can create jobs.
Was I hallucinating?
This is my main problem with the Ivy league: they perpetuate crony capitalism.
Kudos to BR for a flamethrower-style post that left its target smoldering and crisper than any autumn leaf.
Fans of The White House would say that President Obama is turning a corner and making economic policy his own. All Presidents rely on help upon arrival but the good ones know gow to change course midstream.
BR is right and so is The President.
@BennyProfane, time to stop listening to NPR and move over to news you can believe in Fox news radio. Try staying on the road while listening to Glenn Beck or Sean Hannity.
The Topic is a Total Waste of, formerly, good Pixels.. ~~ even, this aspect: “The Obama White House correctly forced the insolvent automakers into bankruptcy reorganization.” bastardizes the Term: “bankruptcy reorganization” .. ~~ “The change people voted for never appeared..” Dude, even Gomer Pyle USMC wouldn’t have been ‘Surprised’..
here’s an image everyone can relate to including Harvard Alumni and students (who lost billions in their endowment fund)-
http://www.truthdig.com/images/reportuploads/solongsummers_399.jpg
and following on MEH’s theme- Surprise, Surprise,Surprise- your money’s gone!!! (and why was he picked by Obama again . . .call me dense)
“For a fee (campaign donation) you could write your own regulations.”
Exactly! Laws for sale. That’s where we are today.
Super Trooper
I’d rather be forced to listen to my ex wife’s Celine Dion CD over and over again.
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BR: Hey! I’m on NPR all the time. They have great stuff.
I would like to see a person in the position that would make the Secret Service have to double-up and work twice as hard for the POTUS .. would that be you Barry ? or would you be Goldilocks porridge chair bed “just right” ? or would you knowing its just a temp job play for the future yacht ?
I think I’m drafting you BR .. what the hey .. you in ? its just temp ? it definitely good PR for BR
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BR: heh heh way too many skeletons in my closet to get thru the White House vetting process (but at least I pay my taxes!)
The question, of course, is whether Summers will be replaced by someone not tied to Rubin. Do you suppose that’s within the realm of the possible?
I don’t think it was ‘a lack of nerve’, I think it was a lack of votes. Were/are the US politicians amenable to the policies you suggest? The Obama admin wanted to go beyond partisanship. Geintner and Gates are examples of an effort to go beyond partisanship. Any effort at compromise means that any policy will be compromised. You are saying that Obama was wrong to try at non partisanship? He should of said “Bush was an idiot and I will not have any Republicans or officials from the Bush era in my admin”? Obama compromises have failed.
Americans blame Obama for the mess they are in now and want to return to the ‘good times’ under Bush. If that is true then Obama can, effectively, do nothing.
Excellent post, BR, typos and all. And a welcome antidote to the hagiography now sitting atop the fold on Bloomberg (dreck, even when copy edited by a pro, is still dreck).
And I would ask that you save this for Nov. 2012, when it will serve as an apt eulogy for the Obama Presidency.
And btw, do you also feel like a piñata, too, BR?
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