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Post How Much Influence Do US Presidents Have on the Economy?
Created by John Eipper on 12/05/12 1:59 AM

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How Much Influence Do US Presidents Have on the Economy? (Paul Levine, Denmark, 12/05/12 1:59 am)

Cameron Sawyer's 4 December contribution is, as always, insightful (though we may disagree on Ronald Reagan's presidency). But for a perceptive look at the failure of Obama to deal successfully with the banking crisis, I can recommend Ron Suskind's Confidence Men: Wall Street, Washington, and the Education of a President (2011).

JE comments:  Paul Levine has become one of the best WAISers for recommending follow-up reading.  I'd love to visit Paul's library some day.

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  • Suskind's *Confidence Men* (Cameron Sawyer, USA 12/05/12 7:36 AM)
    It is not quite right to write about a book which one has not read, but I have read enough reviews of Ron Suskind's book, Confidence Men, to think that I at least understand what the main themes are. (See Paul Levine's post of 5 December.)

    The themes seem to be, more or less, that Obama has failed to get control over quarreling, infighting lieutenants and advisors, and that he has failed to implement the bold agenda he was elected to implement. In particular, Obama was betrayed by Larry Summers and Tim Geithner, and thus failed to fix Wall Street.

    Well, in Suskind's view, "fixing" Wall Street would have meant, among other things, spending $700 billion (!) to nationalize the banks. We can thank God, I think, that such a thing was not done. The ostensible reason for taking this Hugo Chávez-esque measure was to prevent the final collapse of the banking system, although I suspect there were deeper, longer-range ideological reasons in the minds of the more passionate advocates of this approach. As it turns out, the banking system has not, by a long shot, collapsed, and in fact has now come through the crisis in remarkable health. So perhaps Summers and Geithner did a better job than Suskind gives them credit for.

    I don't know everything, of course, and might well have missed something, but I am not aware of any larger thing concerning the financial system which could have obviously been done differently.

    As to infighting advisors and lieutenants--that is par for the course. It could well be that Obama is not the strongest leader we've ever had as president, but I'm not sure we really know yet. And being a strong leader, able to impose a more or less disciplined, unitary line on the complex team of strong personalities which is every White House, is not necessarily always for the better--for example the most disciplined White House in living memory is surely Bush II's, and where did that get us? Reagan's White House was a mess, as was Clinton's. If the the Obama White house avoided nationalizing US banks as the result of being unable (or unwilling) to force Geithner to do it (or try to do it), against his better judgement, then maybe that is a healthy outcome in terms of process as well as results.

    The other specific policy initiative which Suskind attacks Obama for is his failure to deliver a more radical health care plan. Again--does anyone think that something more radical could ever have been achieved? Even if you believe in a more radical solution (and for what little it may be worth, I do not), then surely you understand the value in formulating imperfect reform which can actually be implemented, as opposed to perfect reform, which will never get through Congress or the courts?

    I'm not sure that such a strong case against Obama has been even stated, much less proved.  But I will try to actually read the book over the Holidays.

    JE comments:  Ah, Cameron--you wax eloquently on a book you haven't read.  Ever thought of a career as a literature professor...? (!)

    Seriously now, I'd like to discuss the legacy and "contributions" of Lawrence Summers.  WAISer John Torok just called my attention to a fascinating essay by Paul Cohen, in indignant reaction to Summers' claim in a NYT op-ed that foreign language study for the Anglophone is a waste of time.  I'm in shock--stay tuned for the link and my anything-but-impartial commentary.

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    • Did We Nationalize the US Financial System in 2008-'09? (David A. Westbrook, USA 12/05/12 4:14 PM)
      In response to Cameron Sawyer (5 December), we did in effect nationalize the financial system in 2008/09. We picked winners and losers, and took market risk off the table for winners. We even took enormous equity stakes in AIG and Citi, and facilitated the financing of the mergers of the rest of the losers, save Lehman. We directly nationalized commercial paper, for a while, and student lending, largely still.

      We did almost nothing about moral hazard. Even granting that radical intervention was necessary, as I do, this wasn't necessary.

      That's capitalism of a sort, but one thinks of Africa, as pointed out by Simon Johnson (MIT and IMF).

      While Dodd Frank (which I've taught in seminar, but it's deathly boring) has done some sensible things, it's tough to be too impressed. As a legislative achievement, Dodd Frank isn't in the same solar system as the 1933 and '34 Acts. Market concentration is worse (albeit far better than in Europe); nobody believes the systemic risk mechanisms will work under stress. Some of the consumer protection stuff is good, but ho hum.

      Turning to the traditional role of finance, allocation of capital, we've seen notable unwillingness to lend, in part because of negligible interest rates. (I think the effective bound for using monetary policy for stimulus is considerably above 0%.) I need not remind you that growth in this country is horrible, inequality is rising, unemployment is high... and the country is more polarized than ever in my lifetime, perhaps excepting Vietnam. So as a matter of political economy, and while I completely support the need to intervene, I give the Bush/Obama response at best a B at the time, and a C since.

      Intellectually--and the real failing of Dodd Frank--we've not come very far. And surely traditionalists who annoy people, like Summers, was a stupid way to try to get serious thinking done.

      A lot more was possible. But that would have required confronting Greenspan's correct claim that "the edifice collapsed," and asking for the reformation of finance as an intellectual discipline, and ultimately, of political economy. I did a lot of work on this at the time, issuing it in a book, Out of Crisis: Rethinking Our Financial Markets.

      See http://law.buffalo.edu/Faculty_And_Staff/submenu/Westbrook/reviews.asp#2

      Since then, I've been thinking in large part about the stasis of elites on both sides of the Atlantic. I'm also trying to think about what may be hoped from political economy.

      JE comments:  Who needs a refresher course on moral hazard?  Please forgive this language teacher--Economics 101/102 was a long time ago:


      Really smart and provocative stuff on WAIS today.


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    • Suskind's *Confidence Men* (Paul Levine, Denmark 12/07/12 2:04 AM)
      I am a great admirer of Cameron Sawyer's contributions to WAIS. But I am astonished that he would opine on Ron Suskind's Confidence Men (5 December) without reading it. Perhaps some reviews have misled him? Suskind's book is less a polemic than a detailed narrative of Obama's first term as president, with the focus on domestic policy. He is critical of aspects of the president's policies--or rather policy failures. Here is a summary of his criticisms:

      1) There was a lack of focus in Obama's policy. "When Obama took on three great challenges at once--the economic crisis, financial restructuring, and health care reform--it seemed no one had the temerity to say, 'Mr. President, any one of those three would be more than enough to challenge a new president with so little executive experience.'"

      2) There was a failure to put together the best team for making economic policy. As a result, there was more of what Walter Lippmann called "drift" than "mastery." Obama's choice of Summers and Geithner was unfortunate when better people were available. Faced with economic crisis, an inexperienced president relied on the retro policies of the former Clinton administration. Summers and Geithner had been part of the Clinton team that had gutted and then destroyed the Glass-Steagle Act and rejected regulation of derivatives. Summers's outsized ego and Geithner's timidity created dissonance and ended up undermining Obama's reform policies. Early on, a powerful colleague, Sen. Byron Dorgan, told Obama bluntly he had made a mistake in choosing Summers and Geithner whom he knew well. "You've picked the wrong people," he said. "I don't understand how you could do this. You've picked the wrong people!"

      3) There was dysfunction in the running of the executive. Obama's choice of Rahm Emanuel to run the White House ended in an often chaotic administration. Moreover, a macho blunderer, Emanuel conspired with Summers to sideline the considerable female talent in the administration who called for more positive action: Christina Romer, Sheila Baer and Elizabeth Warren.

      4) There was a pattern of inaction: of deferring decisions to more discussion or, what Obama called "relitigation." Even when Obama made a decision to act boldly, Geithner subtly subverted or diluted decisive action. "When dramatic reform or restructuring was proffered--for Wall Street, for jobs programs, for deregulation of all kinds, he'd often say, Let's assess the 'Hippocratic risk.' The risk, in short, of doing harm. For a new president, with a powerful intellect but little experience, this stance was always available as a sensible course. As Obama learned the limits of pure intellect, in hour after hour of relitigations, Geithner's posture increasingly felt like a prudential path, rather than backing away from history's call to arms."

      5) The consequence was that Wall Street would be rewarded without extracting a cost: the banks were revived but not reformed. Even Obama's supporters realized this. Alan Krueger, a top labor economist, observed, "We lost the country with those AIG bonuses." A prominent banker said: "For Washington not to demand anything when it saved us, even stuff that we knew is for our long-term good, was one of the stupidest moves in modern times. I figured Obama understood that--it wasn't a nuanced point--and that he'd act as we started to pull out of the abyss six months ago. But he didn't, and I don't know who to thank. I feel like I should go over and hug Tim. It's a shame we can't pay him, 'cause that's a guy who really earned a big-time bonus."

      As Suskind concludes: "A titanic crisis . . . had come and gone, and neither Washington nor Wall Street had fundamentally changed."

      In closing, let me ally myself with the comments offered by David Westbrook on the economy (5 December) and Gilbert Doctorow on Larry Summers (6 December). And let me leave the final words to Paul Volcker, one of the legendary figures Obama bypassed in choosing Summers and Geithner:

      "The trouble with the United States recently is we spent several decades not producing many civil engineers and producing a huge number of financial engineers. And the result is shitty bridges and a shitty financial system!"

      JE comments: Ah, the AIG bonuses. How much indignation they caused, but most of the nation has now forgotten them.  America doesn't keep grudges long.

      My thanks to Paul Levine for this excellent overview of the Suskind book. I'd especially like to continue our discussion on point 5, above. Should we blame Geithner for reviving but not reforming the banking system?  Or Summers, WAISdom's whipping boy of the week?  How much genuine change was even possible, given the gridlocked Congress?  To revive the financial system was a "national security threat" that everyone could support; to impose any significant reform would involve ideological debate and endless accusations of government meddling and socialism and the like.

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