The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age
    Doctor Cleveland's picture

    Larry Summers Is Not the Main Problem

    I'm as pleased as anyone that Larry Summers has withdrawn from consideration as the next Chair of the Fed. I thought he would do a terrible job. But Summers himself was never the real problem. His candidacy was only a symptom. The real problem is that we have a President who wanted to nominate Summers in the first place. Obama does not understand what's wrong with the American economy, and five years into his term, he persists in some basic misunderstandings.

    There are two basic Democratic narratives to explain the 2008 financial meltdown, and they contradict each other. When Obama took office, he had to choose which story to believe. The first story is that the economy thrived under Clinton, and Bush's people screwed it up. I'll call that the Democrat vs. Republican story. It's partisan, but not ideological.

    The other story is that Clinton's economic policies led to a short-term boom, but set us up for the long-term bust that started in 2008. The toxic securities that crashed the system in 2008 were deregulated under Clinton. Deregulation of banks started under Clinton. Clinton thought Alan Greenspan was a genius. The list goes on. The Bush people, at worst, only exaggerated what Clinton's people had already been doing. Their basic emphases (favoring investors over workers, worrying more about inflation than unemployment, etc.) were the same. Call this the Left-vs.-Right story. It's ideological, but not partisan.

    You can't believe both of these stories if you're going to actually come up with a plan to improve the economy. You have to pick one. If the Democrat-vs.-Republican story is the right one, the best thing to do is to put Clinton's old economic advisers back in charge. But if the Left-vs.-Right story is true, then putting the old Clinton guys back in charge is the LAST thing you should do. Clinton's economic policies, devised by Robert Rubin and the so-called "Rubinites" associated with him, are either the way out of our country's economic mess or a way further into that mess. It can't be both.

    Obama clearly chose the "Clinton knew how to run the economy" story at the outset of his first term. That makes sense. Obama had never had a strong personal vision for economic policy. (Read the economy chapter in The Audacity of Hope and you'll see what I mean.) He was immediately forced to take responsibility for a national economic crisis that had hit late in his election campaign, giving him almost no time to think our economic problems through or develop new policy ideas. And he had to stop the bleeding somehow. Going with the Democrat-vs.-Republican story gave Obama a ready-made team to put in charge and a set of basic policies to follow. (Larry Summers, Clinton's old Treasury Secretary, is one of the main Rubinites.) Going with the Left-vs.-Right narrative would have meant coming up with a completely new team and a completely new set of ideas. But who would he have picked? How would he distinguish good policy advice from bad? Accepting the Left-vs.-Right narrative meant moving into uncharted territory during a national emergency. Throwing out the old playbook and starting over is a much riskier move, and Obama hates unnecessary risks. Electing Hillary Clinton instead of Obama would not have avoided this problem. Hillary would have relied on Bill's old economic advisers, too.

    While Obama's original choice might have been reasonable at the time, it has also turned out to be wrong. Five years later, growth is still sluggish, unemployment still high, and income inequality more rampant than ever. We've had five years of the Rich Man's Recovery, where the tiny fraction at the top have started growing even richer than they were in the Bush II years, but the rest of the country is still nowhere close to getting back to economic health. Not only is that not success, it's potentially a recipe for much bigger failure. The high levels of inequality make the whole system less stable and more prone to catastrophe.

    Sure, we are almost certainly better off than we would have been if McCain, rather than Obama, had been calling the shots, and better off than we would be under President Romney. A move to the kind of Austrian economics that people like Rand Paul favor would have been a disaster. Obama understandably wants credit for keeping the economy from going off the rails completely and for whatever recovery has taken place over the last five years. He's committed on some level to defending his earlier decisions, and doesn't feel he has any room to maneuver on his left. He's right as far as that goes: his centrist policies are surely healthier than hard-right economic ideology would be. But "better than crazy" is not good enough. And while Obama's policies fit reality better than the right wing's do, the actual economic reality is still far to Obama's left.

    Centrism is almost never the long-range solution to a fundamental crisis. A major crisis is usually a sign that a set of policies have major underlying problems. Sticking to the middle of the road makes sense in the good times, but disasters as big as 2008 are reality's way of telling you that you are on the wrong road. Proceeding cautiously down the wrong road and obeying a reasonable speed limit only changes how fast you get lost. To actually get out of trouble, you have to turn around and go in a different direction. That Obama wanted to put Larry Summers, the chief advocate of deregulating the exotic securities that caused the 2008 crisis, in charge of the Federal Reserve, shows that Obama still thinks that he can keep going down the Clinton/Bush economic road and it will all be okay if he just drives carefully enough. That he wanted to have Larry Summers riding shotgun with him is bad. But even if Summers isn't officially navigating, Obama is still following the wrong directions.


    This is a splendid essay, a more cogent and compelling summary of the contemporary economic disagreements within the Democratic Party than I have ever read. Very well done.

    A question that troubles me, personally. I tend to agree with you, but I doubt my own authority on the matter. Who am I to decide between Summers and Yellen, both of whom know far more about economics than I do? I might conjecture that Summers is blinded by his preconceived ideology--many brilliant minds have succumbed to such biases--but I have no reason to think that he is any more biased than Yellen...or myself.

    So I agree with you, but I'm hesitant to take a stand on it. I'm curious what your thoughts on my dilemma.

    Thank you, Michael.

    I think the sway to evaluate specialized experts when you can't check their work is to look at their predictive ability over an extended period of time: not their ability to explain things post hoc, and not their ability to make short-term predictions, but whether things over the long term fit their model.

    This is how I think about global warming. When I first heard of the global warming hypothesis, I understood enough to know how it basically worked (increasing greenhouse gases raise the overall temperature of the planet, and when the ice caps start shrinking things get worse because you lose some albedo), but not nearly enough to investigate on my own. I have grown more and more convinced of the global warming hypothesis because things it predicted keep happening. The polar ice shrinks every year. Overall average temperatures keep rising. The extreme storms that the model predicted would become more frequent have become more frequent. Scientists made what Karl Popper calls "falsifiable predictions," predictions that would prove their model incorrect, and those predictions have generally been confirmed.

    On the other hand, Alan Greenspan testified at the height of the real estate estate bubble that the real estate market could not possibly be experiencing a bubble. He was very wrong. And the theories he relied upon to make that prediction have to be doubted.

    Larry Summers said CDOs, interest-rate swaps, and credit-defaults swaps should not be regulated. He was very, very wrong. He said New-Deal-era banking regulations were excessive and should be lifted. He was almost certainly wrong. His predictive abilities have been thrown into serious doubt. He should only be trusted again if he moves to a different set of basic theories, and it's clear he has not.

    In 2009, Paul Krugman said that a federal stimulus should be x number of dollars, based on a calculation of lost aggregate demand in the total economy. (The point is that the stimulus was meant to replace the consumer spending, etc., lost in the meltdown, and therefore had to be as large as the amount it was replacing.) Krugman predicted that the economy would not recover if the stimulus was smaller. Summers persuaded Obama to propose a much smaller stimulus, saying that it would be enough to bring the economy roaring back. What happened is what Krugman predicted, not what Summers predicted. Who are you gonna believe?

    In theory, yes, but the extremely limited data points make that awfully unscientific. It's way too easy to interpret the limited data in such a way as to validate our assumptions, which I suspect is what we're all doing when we evaluate these folks.

    Today's SMBC reminded me of this conversation:

    Know your branches of economics!

    But isn't that lack of expertise true in almost every field for everyone? I read enough to discuss rationally on most subjects in the news. But I'm surely not knowledgeable enough to discuss the intricacies of the differences between Yellen and Summers with Krugman and not sound like a fool in comparison. I know some of the arguments in the health care debate but I surely could not write a comprehensive health care bill. The only area of human knowledge I feel I'm an expert in is music, theory and history, with a focus on jazz. I could hold my own there in a discussion with some college professor on early jazz singers like Cab Calloway to avant-gardists like Steve Lacy or Eric Dolphy.

    We can either opt out of discussing, influencing, or deciding on issues we lack expertise in, imo abdicating our responsibility as voters and citizens. Or we can read to the level we're able, make our best guess and try to move those policies forward.

    As Heinlein as Lazerus Long said, “To get anywhere, or even live a long time, a man has to guess, and guess right, over and over again, without enough data for a logical answer.”

    And since I mentioned the great Cab Calloway here's video that I love so much I have to share it.



    You're right, ocean-kat. But you know, it's not the guessing that I mind, it's defending my guess to others. When it comes to the particularly abstract and error-strewn field of economics, any attempt I might make to argue a case is inherently full of shit. When there's a consensus of expert opinion--as in global warming--I have no problem citing the consensus. But Summers vs. Yellen? It's like trying decide which prominent physicist has the correct theory of dark matter.

    When I was a kid--and still--I always loved cartoons that had this dark, sort of Fellini-esque feeling. Some of them played like the old newsreels.

    While I agree with you on the Audacity of Hope Obama, I disagree that the 2008 Obama hadn't thought it all through. He basically went with "the Chicago School." It was put in print, right here:

    Obamanomics by David Leonhardt, New York Times Magazine, August 20, 2008.

    There is both criticism and praise of Clintonomics in it. Both as regards the Clinton years and the present at the time.

    Also it's really not accurate to present that Summers, Rubin et. al. have kept on thinking everything they thought in the Clinton years was correct.


    The leave us alone free market champions of Wall Street sure cheered the news today that the government would keep intervening in the economy, by not removing the Fed $85 billion a month punchbowl.

    I'm not holding out much hope a Yellen Fed would be much different than a Summers Fed, a Bernanke Fed or a Greenspan Fed. We are in another bubble and the little guys will again get sheared before it ends. The Fed is out of 'gas', it has had the pedal to the floor, for 5 years.  The next bust may be already baked into our economy, and could be worse than the last, the Fed has no bullets left.

    Yellen's comments like below are worrisome:

    The inflation threshold “makes clear that the Fed is willing to tolerate inflation temporarily above the long-term target as part of a policy that accelerates improvement in the labor market,”

    The Fed has been printing money with 0% funds for Wall Street through the Discount Window, since 2008. Five years. At some point a surplus of dollars may send the currency into a decline, or commodities into orbit, forcing the Fed to act to raise rates. Another recession would be certain.

    Paul Volcker has said inflation is very hard to stop once it gets started, any Fed Chair who thinks they can turn it up or down without huge economic disruptions is dreaming.

    Wall Street has loaned or arbitraged the free money anywhere in the world they can make a buck. American workers wages have stagnated, whatever affect the money printing has had on Main Street is done.  Inflation is a very bad thing for the poor, those on fixed incomes, small businesses and workers who have no prospect of raises, and anyone needing to plan for investment. A Yellen money printing QE Bonanza and 0% Fed policy forever could end very badly.


    If I've linked it properly this exchange on Brad delong's  blog is sort of an inventoryof all possible Fed chairmen.

    Worth scanning.

    This does cut right to the heart of things.

    I'd suggest, without in any way trying to defend Clinton here, that the problem is actually rooted in Reaganism and even the Carter era deregulations.  It's part of the political culture that started in the late 70s -- a cross industry unwinding of regulations in an attempt to deal with nascent and accelerating globalization.

    It first reached finance in the 1980s for a couple of reasons.  First the development of mortgage backed securities at Salomon Brothers and the first loan syndicates, as well as the development of the junk bond market, changed the nature of credit, making things far more liquid and accessible.  Second, the popularization of the 401k and resultant slow death of pensions somewhat democratized equity ownership either directly or through mutual funds.  Mutual funds exploded as a business in the 80s and 90s.

    The Savings and Loan scandals laid bare the vulnerabilities of small banks in torrid credit markets. Multiple failures of those institutions allowed for consolidation of the industry.  But this aided the growth of megabanks from the bottom up.  Consumers had reason to want to have their mortgage, credit cards, investment portfolio and consumer banking all in one place.  From there, it was a short leap to blur the lines between commercial and investment banks as so many investment banks already offered bespoke consumer banking to the very wealthy (JP Morgan was Chase for the rich before it was JPMorgan Chase for everybody).  I don't believe that the repeal of Glass Steagall was wise, but I see how it happened as part of a decades long zeitgeist of deregulation.

    As for the rest of Clintonism -- he supported the trade agreements that accelerated pressure on American workers but it was all obscured by the lag in its actual taking effect and the wealth effect of the dotcom boom. He funded deficit reduction with, at least, progressive taxation.  The surpluses were immediately squandered by Bush, who redistributed the money to the wealthy.  In that, Obama is correct that Bush mishandled Clinton's economy.  On the other hand, unless Clinton expected that Gore would eventually use those surpluses to directly help the workers hurt by globalization, then deficit reduction was probably a silly goal for Clinton to have pursued. But, that's an aside.  Bush definitely squandered the surpluses and so you could prefer Clinton to Bush, economically, just based on that.

    So far as banking regs go, the problem is much deeper.  Both parties are firm dereggers.  Both parties believe that banks must be free to compete globally.  At no point after the crisis did we come to any sort of national consensus to do anything that would radically change the way the industry operates.  It's not just Larry Summers or even just Obama, it's everyone.

    I'll put it another way -- right now, the hot thing is for mutual funds to bill themselves as "liquid alternatives" by trading the types of exotic instruments normally found in alternative partnerships (hedge funds).  The great "anything goes" is still going.


    Well, yes. We can push the story back further. And the real story is the Democrats' acceptance of Reaganomics as a non-extreme position, so that their own position is simply a moderate "alternative" version of the Republicans' approach.

    To put it another way: post-Reagan Democrats are like post-FDR republicans on economic issues. Eisenhower and Nixon accepted the New Deal as the basic reality and worked within its parameters. Republican economic policies between 1952-1980 are just New Deal Lite.

    Likewise, Clinton and Obama accept Reagan's policy (or his anti-spending ideology) as a reality they can't change and work within its parameters. (Remember "The era of big government is over"?) So their policies are Supply Side Lite.

    We haven't had a grand political realignment, yet, that pushes the Overton window back to the left on money issues. But we have had a reality realignment, meaning the spectrum of politically "realistic" options no longer suffice to deal with the actual problems we're facing.

    Yellen supporters say Summers is less oriented towards Main Street, and more to Wall Street, yet when he withdraws and Yellen becomes top candidate, Wall Street throws a big party as we have just witnessed.

    Doc says 'Summers supported deregulation'. Does Yellen support re-regulation and will she actually do it? Pardon me if I doubt it.

    Aside from continuing to print money and hand it over to speculators at the big banks with the excuse 'unemployment is too high' (and has been over 5 years of QE), can anyone point out one current policy Yellen says she will implement, that is a sharp change from Bernanke, or Greenspan?

    I am talking about what she would do different now, not stuff like: 'she didn't like the 1999 deregulation', or 'she voiced concern over housing in 2007'. Is she going to stop GS from gaming aluminum warehousing, or oil?

    I seriously doubt Yellen will do anything real in the way of regulation or enforcement to rock Wall Street's ocean liner. They don't seem to be heading for the lifeboats.

    I've always suspected you are right. But then there's the personality difference: Summers is known asshole, so famously that this rep has even made it into Hollywood scripts. And that made me wonder why the heck Obama was so enamored of him! It can't be that he wanted an asshole saying stupid inflamatory stuff from time to time? There must be something else?

    Summers is known as an asshole but, in my experience, the people who say they like him really, really like him.  One of my mentors, an active Harvard alumni, knows and loves Summers and will defend him to the end. Then there are people who just really, really like to fight and because they (Steve Rattner, I am looking at you) are also kind of considered assholes, they see Summers' asshole behavior as simple tough-mindedness.  If Summers tears them down in a meeting they somewhat like it.  They have withstood the assault and feel better for it.

    Maybe he's just a divisive figure.  It's not that everybody hates him so much as it is that few people are "meh" about him.


    I am strongly influenced by Brad DeLong's endorsement of  Yellen.Brad's comments over the years have seemed always sensible( i.e. in line with my prejudices.)

    He has an op ed in today's FT repeating that he had preferred Summers'  but absent that possibility Yellen must be chosen.

    Obama's view of Summer is probably goes back to the financial crisis not just by what was decided then  but by the possibilities of which we may have never heard  that were  considered but rejected.



    DeLong's piece is behind a sign-in wall at FT. Not worth my bother.

    Aside from 'in my opinion she has a better grasp of policy' or "she really cares about the unemployment rate" what's so great about Yellen, what specifically would she do differently?

    Wall Street seems to think she is a push over, they are more afraid of Summers, and they should be afraid of somebody with the crap they have, and still are, pulling on this nation.

    Fair comment that if he disagreed with them Summers would have been a more formidable opponent for the bankers.

    The hope is that Yellen will actually disagree more often. And more effectively not having just finished insulting her fellow governors.

    Somewhat analogous to the old days with  Moynihan and D'Amato as the NY senators.

    If  you asked Moynihan for assistance on a visa he might respond with a subtle  analysis of the benefits of internnational travel..

    If you asked  D'Amato, you got a visa.

    Since you were deprived of the FT crouched behind its wall, here's one sample


    "(Yellen) taught me something important ,something that I had not previously known and would not have thought of on my own. In a conference room at the Brookings Institution ,she explained just how the welfare benefits of lowering unemployment were of much greater value than the mere boost in production it  brings. For example is also means fewer people in the wrong type of job."


    What a wonderful summary of what's wrong with the Democratic Party.  I am in the left v right camp.  Both Clinton and Obama simply adopted reagonomics, which, strangely, is the centrist position today.  As Jim Hightower said, the middle of the road is no fit place for anything but a yellow stripe and dead armadillos.

    But it wasn't just deregulation that put Clinton and Obama in the "center".  They also jumped into the globalization pot with both feet.  Obama implemented the 2006 FTA with Colombia and there's more of that to come under Obama with the Trans-Pacific Partnership.  Perot's swoosh becomes a crash  as blue-collar jobs are sent out of the country knocking workers off the payroll.  No one in either party talks about it and no one in either party knows how to fix it. But they keep cooking up the same toxic stew of lost jobs and lower wages.

    Elizabeth Warren may have opened the way for a return of responsible Democratic Party values.  However, the possibility of Hillary running in 2016 puts the kibosh on any hope of change any time soon.

    I should add that Yellen is big on full employment from what I've read. Perhaps she has some ideas in that department.

    Yellen 'ideas', repeal Glass Steagall, Cut SocSec, OK NAFTA. Meet the new boss......

    While supporting Yellen has become a cause célèbre for progressives opposed to Summers' regulatory hostilities, Yellen supported a host of economic policies during the Clinton era that have since become broadly unpopular. She backed the repeal of the landmark Glass-Steagall bank reform and she supported the 1993 North American Free Trade Agreement. She also pressured the government to develop a new statistical metric intended to lower payments to senior citizens on Social Security

    Globalization is the "conventional wisdom": no sense growing oranges in Switzerland or building ski resorts in Portugal. But IMHO this may be the place where it least applies: we can do both oranges and downhill. 

    We ( maybe including  Canada) could be self sufficient. But if 1% of the population continues to take 30% (or whatever the number is ) of our wealth self sufficiency by itself is not the answer. 





    I haven't mentioned Yellen in the post or in the comments. But I hope it's clear that if I write a post saying that nominating Larry Summers for Fed chair is not the main problem, I also don't consider nominating Yellen for Fed chair the whole solution.

    The entire conversation among our elite policy-makers is out of sync with the economic realities on the ground. I don't know enough to come up with actual proposals, but five years in it's clear that everyone who can get listened to in meetings is out of touch to one degree or another.

    The elite in this country in general is out of touch with realities of most people now.  The ones who do aren't speaking up.  Wall Street is full of men who are sure they can handle any women.  I don't think Janet Yellen is a push over.  The Fed can't fix what Congress won't change.  It is up to us to put better people in Congress so they will do their job.  

    Thanks, Ramona.

    This tea party Congress was born from the womb of anti-Obama backlash with a birth mark saying "defund Obamacare". The reality is that as various folks find out it is in their self interest to enroll in an exchange the program will gain in popularity---which is exactly what Cruz said, that is, "people will get hooked on it". So the defund vote is a show vote to insure the particular member is not challenged from the right.

    As for the food stamp vote, it is despicable and the truth is it effects many poor white folks in red states. In terms f the awful reality I encourage people to find a local food bank and make a contribution, which is what I'm doing.

    Just saw this, Oxy.  It's misplaced under Doc's post, so I'm not sure I should be responding to it here.

    I agree with you, and it's both commendable and necessary that we support food banks as much as we can, but people on food stamps still need food banks.  We can't let up on the food stamp fight.  Millions of poor people, including the working poor, count on them both.


    I perused this yesterday, but I have to say having read it all the way through that it is one of the finest essays on the current state of the economy that I have read--anywhere.  I mean that.

    Whether it's centrism, or whether it is that the needle defining at which point we now find a center, it is not working. 

    Ramona's blog is an excellent corollary to what I take from what you're writing about here.  Those of us who resist the tepid approach we see in the president on economic matters are left fighting to maintain what little there is left ensuring the bare minimum of what we a call safety net.  It's frustrating.

    Rising inequality, an overall drop in real spending power, finding it "groovy" to define a progressive outlook that disdains labor unions for just doing what they're supposed to do--representing working people--and a crumbling national infrastructure crying out for the kind of investment that we seem only willing to make in time of wars--these are the things that we need to take a collective deep breath and focus on.  (Not sure if I would get a D for this sentence but you know what I mean)

    I don't blame the president for everything, and I really do think that he wants to do the right thing and I find myself defending him more than I ever expected to, particularly for how he tackled healthcare (not perfect but promising I think). 

    But this dog just isn't hunting.

    Thanks again Doc.  Really nice work.

    As per usual addendum: Obama will not move unless he is convinced that we have his back.   Can the historians among us say that FDR, who campaigned for a balanced budget in 1932, was any different?  This is not a defense, but politicians are in the world of politics.  Perhaps to some extent the issue is how one convinces the president and Congress that we have there backs--and then maybe as a condition precedent we have to be their in sufficient numbers ourselves?  Or something.   Thanks again Doc.

    Thanks very much, Bruce. That's very kind, and I really appreciate it.

    I certainly agree that Obama needs to be supported while we push him towards the left, and the example of FDR (who pulled back from the New Deal too early in 1937) is an excellent one. This isn't about personalities. It's about changing the basic framework of the debate.

    Dear Doc,

    Perhaps it was the avidity with which I consumed this very good article, but somehow, when I got to the end, I expected you to lay out the preferred alternative to "centrism." I was waiting for it, but it never came.

    Is it just lots of government spending (say the amount Krugman recommended) to create jobs and repair the country's infrastructure? Or what?

    I am way out of my depth on matter economical, but it seems to me that one problem with just replacing the missing private sector spending is that it wouldn't necessarily have solved the debt problem.

    IOW, it wasn't just that people had lost their jobs and stopped spending. It was also that their biggest asset had in many cases gone underwater. They couldn't unload their home and buy another. And they still owed huge amounts on a mortgage that was way out of kilter with home values.

    In addition, they were very much in debt in other ways and were no longer able to service the debt or use increasing asset values to "outrun it," so to speak.

    So even if folks had gotten their incomes returned to them, they most likely would have pulled in their horns and paid down debt or paid down their mortgage or down sized their homes. I'm not sure that debt servicing brings back the economy.

    Of course, if the dip had been shorter, and not so many people had lost their jobs for extended times, then maybe they would've gone back to their free-spending ways.

    All of which is to say that maybe even Krugman underestimated the amount of money the government would've needed to spend to right the economy.

    Krugman is on record, I think, in dismissing the thesis that there are structural problems with the economy which would not have been addressed just by more government spending. For example, large mismatches between labor's skills and the new wave of jobs aborning mostly through the advent of new technologies.

    But is he right about that? Seems to me we need a massive, national retraining and job clearinghouse function that would retrain workers for new kinds of jobs and make sure these workers and the employers who need them make the match.

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