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View Full Version : Economics Best commentary on Summers I have read


KC native
09-23-2010, 12:12 AM
from Ritholz

http://www.ritholtz.com/blog/2010/09/summers-good-riddance/3

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Summers was the Treasury Secretary when Glass Steagall was repealed.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.