The departure of Larry Summers as President Obama’s chief economic adviser will provoke no tears on this blog, but more about that later. Before we bury Summers, let us praise him.
We may forget now, but, to paraphrase Wellington on the Battle of Waterloo, the Great Panic and the months after it were a near run thing. The financial collapse was so large, contagious and complex that the global economy might have ended up in a depression that made 1930 look like a mild downturn. The Bernanke Fed, along with Bush Treasury Secretary Hank Paulson, Tim Geithner as New York Fed President and then Obama Treasury Secretary, and Summers, the protege of Robert Rubin, as Obama’s most powerful policy man, can claim much credit that the sum of all fears was avoided.
As with Afghanistan and Iraq, Mr. Obama was eager to convey continuity and stability. Wall Street loves Rubin and Summers. And by “Wall Street,” I mean the world capital markets whose destruction could have brought on so much more pain than we now see. To hear UC Berkeley economist Brad DeLong tell it, Summers is also best at the essential functions as presidential adviser.
Yet Summers leaves amid much criticism. He’s one more “socialist” “communist” or “fascist” to the re-energized right. He’s a toady for Wall Street swindlers to many on the left or even center. The economy remains in deep trouble, especially with lack of jobs.
Summers was very much a man of the old order, and saving and propping up the old order was the goal of both administrations during the panic.In other words, the big banks, the shadow banking system, Goldman Sachs, complex, hidden and little-understood derivatives, trading for the sake of trading (with taxpayer money), wild compensation and the whole deregulated casino. In the Great Depression, the old order lost its legitimacy among economists and its clout in Washington. This time, it came out if anything stronger, with the weak culled out. In both instances, the old order caused the collapse.
Many of us supported TARP on the assurance that reform would follow rescue. It never happened, Paul Volcker was marginalized. Too Big To Fail banks remain. No Glass-Steagall. The casino’s still open. The system remains vulnerable to further meltdowns once a new bubble bursts or shock hits. The capital markets are too detached from funding job-creating, productive enterprise. A question for historians will be how much the old order had a gun to the heads of both administrations and Congress through its huge financial clout.
But Summers was a man to reassure the old order, not reform it. He did a heck of a job.
Today’s Econ Haiku:
Where to get my booze?
The state or a private store?
A taxing question