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Friday, September 24, 2010

Transcript: 405 Summers out, Recession over, Fed still at sea

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Today on the podcast, personnel changes at the White House, the NBER calls an end to the recession, and then carbon prices, the engine of economic recovery question mark, with Joseph Stiglitz and Johan Rockstrom.


Larry Summers is leaving as point man on the economy in the White House and returning to Harvard. This may signal a change in economic tack, and will likely be welcomed on the Left. On the Right, House Minority leader John Boehner has already called for Summers' firing. Many progressive economists feel that following Summers' advice not only led into stagnation, but wasted a good crisis. His Timely, Targeted and Temporary mantra ginned up the ineffective Bush stimulus. His carefully parsed advice and analysis was always, critics say, a day late and a dollar short. Will things change? The political winds are turning and the possibilities for progressive action are much more limited today than they were two years ago. We've been asked who we would prefer as his replacement. Joseph Stiglitz was Bill Clinton's chair of the Council of Economic Advisers, James K. Galbraith was staff director of the Joint Economic Committee. Either of these men would be what the country needs economically. Politically, it is not going to happen. I would suggest a progressive business person, there are many, I'm sure. It would take away one of the complaints from business and at the same time grant some status not likely in an academic.

But what does Robert Scheer, journalist and author of The Great American Stick-Up: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street


Summers' departure is certainly to be welcome. My book is largely about the follies of Lawrence Summers, beginning in the Clinton administration, when he pushed through the Commodity Futures Modernization Act, which opened the floodgates to all of these toxic derivatives that he, as much as anyone in the country, bears responsibility for the economic debacle. And then Obama brought him back. And I think what he has done is basically throw money at Wall Street, continue the Bush policy, and get nothing in return, particularly in the way of relief for homeowners—you know, mortgage foreclosure, a moratorium on foreclosures. And so, I think this is really good news. And, you know, I hope he’s not replaced with someone worse, but it’s hard to imagine someone worse.

the New York Times today, Barack Obama, President Obama yesterday, referred to this guy as "brilliant." And I don’t know how many times you have to fail before you’re considered to be something less than brilliant. And this guy has been a disaster at every position he has held. He was the Treasury Secretary under Clinton who presided over the radical deregulation of that administration, fulfilling the fantasy of the Reagan Revolution. The Republicans couldn’t pull it off. Summers and Robert Rubin, his mentor, did pull it off. And it’s been—this is the basic root cause of this meltdown. Then he goes to Harvard, where he was a disaster as president, divisive, mysogynist, demeaning of women and so forth.

And meanwhile, he’s being paid not only close to $600,000 by Harvard, but then he goes and consults on Wall Street. He was paid $4 million by D.E. Shaw, a hedge fund, and you’ll notice the Obama administration has not reined in hedge funds at all. And he received almost another $4 million in speaking fees. He got $135,000 from Goldman Sachs for one short speech. He got that much from Citigroup for two speeches. You know, so this guy, while he was advising Obama, he was raking it in, eight million bucks, while he’s an adviser to the candidate.

And then, for reasons that Obama will someday have to explain, he’s brought in as the key guy. It’s not Geithner. Geithner is a water carrier and was very much a subordinate in the Clinton administration to both Summers and Rubin. And they bring in Summers, and what he did is, again, follow that strategy, reassure Wall Street, don’t spook the markets, give them what they want, submit to their blackmail, and make them whole. And they continued the Bush policy with a vengeance, throwing money at Wall Street. The Fed now holds $2 trillion worth of toxic assets taken off the books of the banks. The banks still hold a massive amount. And every time the housing market looks like it might get better, they dump this stuff. The Fed announced yesterday that the economy is not getting better. They’re very troubled.

So what is the legacy? You know, it’s like Vietnam. Vietnam, as David Halberstam once wrote, was brought to us by the best and brightest, people who presumably have the best education and, you know, are sincere and smart and so forth. And the economic meltdown reminds one of that and Vietnam. I mean, if this is what brilliance means, let’s have a sort of ordinary common sense for a while. And common sense will tell you, help the homeowners now. You’ve done enough for the banks. Get something back from the banks. Make them, you know, readjust those mortgages. Don’t have it be voluntary. Empower the bankruptcy courts to help the people who are struggling, the 40 to 50 million people who are already underwater on their mortgages, but everybody else. And if you don’t do that, you’re not going to fix this economy. And I don’t care whether he brings in a businessman or a labor leader or brings in Stiglitz or makes Paul Krugman his adviser, whoever he brings in has got to tell him that, or we’re not going to see progress.

Another positive personnel move was the addition of Elizabeth Warren to organize the Consumer Protection Bureau for financial products. Many have characterized her as a fierce watchdog for consumer interests. Our take is that the bureau will analyze and standardize financial products and thus introduce market competition, along with safety. This setting up of the office and its processes is thus a vital period.

Last week the economic news centered on the likelihood of an extension of the Bush tax cuts. The president has proposed making permanent the tax cuts for everyone earning less than $250,000. Senate Republicans threaten to block such a move unless it brings along those in the higher income brackets.


We half agree with Mitch McConnell on this. That the economy is in the middle of recession. Unfortunately for both Mitch and Demand Side, the National Bureau of Economic Research, which is the official arbiter of recessions, called the official end to the 2007 recession as June of 2009. Neither credit markets, employment, housing, investment, nor consumer sentiment have recovered, nor has the economy returned to the levels of production of 2007, but there is enough light in the tunnel for the NBER, which said, in part:

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

Demand Side does not see a normal business cycle in any form. In our view, the business cycle remains broken.

Calculated Risk commented:

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.
This is somewhat subjective - and I thought they'd wait longer because the committee usually waits until some of the key indicators have returned to pre-recession levels. This time no indicator has reached the pre-recession level, and some are still very low (like personal income less transfer payments).

If the recession ended in June 2009, it may well be that a new recession began in May 2010. Hard to see how a protracted period of going nowhere is anybody's definition of recovery.

Elsewhere, the Federal Reserve suggested it was preparing the ground for new actions to return inflation to its... well, let's quote:

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

As we've covered here previously, the inflation of financial assets by the Fed has not stemmed the fall in housing, nor stimulated any real investment activity. Pumping more money into the financial sector may be inflating the value of financial assets and possibly creating bubbles there, without touching the real economy.

So, deflation is the risk. Well, yes. Is the Fed going to touch the deflation that is the risk with its low-interest rate policies? No. That debt deflation awaits write-downs and real action. The stagnant price level will continue as long as there is no investment and all economic actors are racing to the bottom.

Monetary policy is not working. Has not worked and will not work.

Investment needs the prospect of profit. Profit needs relatively certain demand. Improving profit by cheaper hiring or equipment or financing effectively short-cirdcuits the demand loop. The demand -- again relatively certain -- for consumer products does not exist, so demand for investment goods which are financed over a period of time does not exist even more and is not forthcoming. Thus monetary policy focused on financial assets labors under the delusion. Absent demand, investment goods will not come on line, so the policy is a failed policy and there will be no recovery.


Now let's move on to part one of our treatment of carbon as the potential center of a rebirth of the economy. Today we offer short treatments by economist Joseph Stiglitz and then environmental observer Johan Rockstrom. Here is Joseph Stiglitz speaking last month in Australia



That was Johan Rockstrom, giving some context. The context of a planet poised for catastrophe while its navigators argue among themselves in the wheelhouse about how to get more acceleration. We need a change of course, not more acceleration. Thanks today to Democracy Now and Amy Goodman for today's contribution from Robert Sears and to the TED talks for Johan Rockstrom.


  1. Until there is a change away from financial profits to actual profits from manufacturing then the US will lurch from financial crisis to another.

    Tobin taxes on share trading will kill the high frequency model and raise some tax funds. Tobin taxes on commodities will kill speculation in those markets. It will still allow markets to be made because genuine buyers will be barely impacted. By taxing segments of the investment banking model that have no social purpose will seriously erode their profits and drive them to areas which are beneficial like providing funds for new business.

    By blocking banks with investment bank arms having access to the Fed window it will stop Fed funded speculation. Banks will have to become banks again.

  2. This is as cogent a prescription as you will find anywhere. Thanks