WHAT DID WE EXPECT WITH LEADERS LIKE THIS?

It’s no secret that the economic recovery in the United States has been meager at best (and that’s assuming you believe this is not just one ongoing recession). While there is plenty of blame to go around for our current plight the buck ultimately stops with the most influential people in this economy – the leaders that help frame the regulations and policies that help to keep the U.S. economy running smoothly. I don’t think these men and women (mostly men) have been held accountable over the years. I personally believe many of these men have flawed models (Alan Greenspan has admitted as much and Ben Bernanke has essentially rehashed his flawed model) and continue to help promote and implement economic policy in the U.S. that is counterproductive, ineffective and at times downright destructive.

I’ve been highly critical of Obama’s economic team over the years because many of them were key players in helping cause the financial crisis. Tim Geithner was the head of the NY Fed when the banks were busy turning themselves into casinos. Ben Bernanke (who Obama should have never reconfirmed) failed to even acknowledge the potential existence of problems in the U.S. economy leading up to the financial crisis and then implemented his great monetarist gaffe which has now been proven to be what I called it from the very beginning – a bailout of Wall Street and a slap in the face for Main Street. He receives endless praise for helping to avoid a supposed second Great Depression. This is like the man who sees a fire in his front yard, ignores it, then when it’s finally becoming a widespread danger decides to save his own house from burning (the banks), lets all of the surroundings houses burn to the ground (Main Street) and then receives endless praise for his courage under fire.

But there have been few people in power over the last 25 years that have been more misguided and downright destructive than Larry Summers. This is a man who believes that women are intellectually inferior (I’ll tell you one thing – this economy wouldn’t be such a mess if it wasn’t run primarily by arrogant, narcissistic males) and has done more to help cause the current financial crisis than anyone.

Mr. Summers has been in the pockets of the big banks at every twist and turn. He was instrumental in helping to deregulate the financial sector. He was a harsh critic of Glass-Steagall and a proponent of Gramm-Leach-Bliley. Summers was also instrumental in ensuring that derivatives remained unregulated. Time and time again he has received generous benefits from the big banks (see here and here) and helped convince the Obama administration that the banks needed to be bailed out more than Main Street.

Perhaps his worst offense is taking credit for the booming 90’s. In retrospect, it’s clear that many of the causes of the current bust were initiated by the policies of the boom years. Warren Mosler, founder of hedge fund Illinois Income Investors (III) met with Summers when he was Assistant Treasury Secretary under Robert Rubin and highlighted his fundamental misunderstanding of the modern monetary system:

Meeting with Lawrence Summers

Several years ago I had a meeting with Senator Tom Daschle and then Asst. Treasury Secretary Lawrence Summers. I had been discussing these innocent frauds with the Senator, and explaining how they were working against the well being of those who voted for him. So he set up this meeting with the Asst. Treasury Secretary, who was also a former Harvard economics professor and had two uncles who had won Nobel prizes in economics, to get his response and hopefully confirm what I was saying.

I opened with a question:

“Larry, what’s wrong with the budget deficit?”

To which he replied:

“It takes away savings that could be used for investment.’ To which I replied:

“No it doesn’t, all Treasury securities do is offset operating factors at the Fed. It has nothing to do with savings and investment”

To which he replied:

“Well, I really don’t understand reserve accounting so I can’t discuss it at that level.”

Senator Daschle was looking at all this in disbelief. The Harvard professor of economics Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true. So I spent the next twenty minutes explaining the ‘paradox of thrift’ (more detail on this innocent fraud #6 later) step by step, which he sort of got right when he finally responded

“…so we need more investment which will show up as savings?”

I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting. And the next day I saw him on a podium with the Concord Coalition – a band of deficit terrorists – talking about the grave dangers of the budget deficit.”

Summers has continually cheered the budget surplus of the Clinton years as if the U.S. government is an entity that should be making a profit at the expense of the private sector. The U.S. government exists to further the prosperity of its citizenry – not to benefit at its expense. It is confounding why so many supposed “experts” believe the government should attempt to run a surplus that, BY IDENTITY, causes the private sector to run a deficit. Unfortunately, Summers is in the majority in believing that the government should run a perennial budget surplus. We have a legion of influential economists and politicians in this country who believe the government is no different than a household in terms of its finances.

We have made some serious errors in the last 20 years, but none is more egregious than this continuation of failed policies. Mr. Geithner, who is a disciple of Summers (who was a disciple of Robert Rubin) remains in power and continues to promote similarly misguided policies. The Summers departure is one step in the right direction, however, President Obama is quickly running out of time as he fails to bail out the water that continues to sink this economy.

Albert Einstein once said the definition of insanity is doing the same thing over and over again while expecting a different result. What is not insane about the current economy being run by Tim Geithner and Ben Bernanke?

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SDF12

    Obama is already out of time. Unemployment won’t drop below 8% by 2012. Any decent Republican strategist can drive this into the skulls of voters. He will be seen as an economic failure. And that’s assuming things actually pick-up from here.

  • Hardy

    I believe these clowns were appointed, and remain, because that’s what Wall Street wanted and President Obummer wouldn’t know any better. Rats deserting a sinking ship? Possibly. Back to Harvard to cure the endowment-fund’s problems? That’s a laugher. Good riddance.

  • goodfriend

    Frightening about politicians monetary policy understanding. Future (republican) congress will vote austerity. At best they will keep tax cuts..

  • TPC

    More likely – back to Harvard where he can pollute young peoples minds telling them women are dumber than men and that we need China to keep buying our bonds…. Students pay 30k/ year for access to people like him….

  • TPC

    We shall see. There is time for him to own this economy. He should boot Geithner shortly. With Summers out there is no point keeping him around. Personally, I’d dial up Jamie Dimon (who would serve as a figure head to get wall st off my back – hey look at me I’m pro business!!!) and immediately install Robert Shiller or James Galbraith. Preferably both.

  • TPC

    The more frightening people are the ones in the Fed. You don’t even want to know some of the conversations I have had with people….

  • Sam_S

    These are truly pragmatic comments. Looking back on Summers’ history really makes one question Obama. How could he even nominate geithner and summers in the first place? Does he know absolutely nothing about economics?

  • 3rdPeriodPoints

    Look, I really don’t want to defend Larry Summers, but I feel I must.

    I don’t know precisely what Mr. Summers said. The link quotes him as such, “…innate differences between men and women might be one reason fewer women succeed in science and math careers.” This is not the same as “women are dumber than men”, as you put it.

    Are you saying that the above quote is incorrect? I believe science has shown it to be (most likely) true. I, and various real scientists, could be wrong, of course. Anthropologist Helen Fisher, put it thusly:

    There’s a lot of gender differences; anybody who thinks men and women are alike simply never had a boy and a girl child. I don’t know why it is that they want to think that men and women are alike. There’s much we have in common, but there’s a whole lot that we are not — do not have in common.

    We are — in the words of Ted Hughes, “I think that we were built to be — we’re like two feet. We need each other to get ahead.” But we did not evolve to have the same brain. And we’re finding more and more and more gender differences in the brain. I’ll only just use a couple and then move on to sex and love. One of them is women’s verbal ability. Women can talk.

    Women’s ability to find the right word rapidly, basic articulation goes up in the middle of the menstrual cycle, when estrogen levels peak. But even at menstruation, they’re better than the average man. Women can talk. They’ve been doing it for a million years; words were women’s tools. They held that baby in front of their face, cajoling it, reprimanding it, educating it with words. And, indeed, they’re becoming a very powerful force.

    Even in places like India and Japan, where women are not moving rapidly into the regular job market, they’re moving into journalism. And I think that the television is like the global campfire. We sit around it and it shapes our minds. Almost always, when I’m on TV, the producers who call me, who negotiate what we’re going to say, is a woman. In fact, Solzhenitsyn once said, “To have a great writer is to have another government.”

    Today 54 percent of people who are writers in America are women. It’s one of many, many characteristics that women have that they will bring into the job market. They’ve got incredible people skills, negotiating skills. They’re highly imaginative. We now know the brain circuitry of imagination, of long-term planning. They tend to be web thinkers. Because the female parts of the brain are better connected, they tend to collect more pieces of data when they think, put them into more complex patterns, see more options and outcomes. They tend to be contextual, holistic thinkers, what I call web thinkers.

    Men tend to — and these are averages — tend to get rid of what they regard as extraneous, focus on what they do, and move in a more step-by-step thinking pattern. They’re both perfectly good ways of thinking. We need both of them to get ahead. In fact, there’s many more male geniuses in the world. When the — and there’s also many more male idiots in the world. (Laughter) When the male brain works well, it works extremely well. And I — what I really think that we’re doing is, we’re moving towards a collaborative society, a society in which the talents of both men and women are becoming understood and valued and employed.

    http://www.ted.com/talks/helen_fisher_tells_us_why_we_love_cheat.html

  • Mercator

    I would agree to this… there might be some defense for Mr. Summers, but not much.

  • InvestorX

    I had the “pleasure” to experience Mr Summers live during a D.E. Shaw event. I have to say that he made an impression of an arrogant, self-sufficient, totally inflated and absolutely uselees hack. It was early in the crisis then and he pretended to understand someting. He was very proud of his help to Mexico and that seemed his only thing done right (and actually it was one of the early bailouts of Citi & Co and throwing of gasoline on the bubble fire). My mentioning of having read Roubini’s roadmap of the crisis meant that he never looked at me again. Before that he mentioned: “You know, Nouriel worked for me before”. I think he never did any real work at D.E. Shaw, but was a MD and got his $5m just for showing in front of some clients.

  • walden

    I have on this web site expressed my deep dissatisfaction with Larry Summers, as a person and as an economist. However, let’s be clear: he never said women were intellectually inferior. At a conference which investigated why there were many fewer women than men in science and engineering, he raised the possibility that women are not as intellectually pre-disposed toward those subjects as are men.

    My wife is a solid feminist (as am I). But she will tell you that when our children were young and she took them, along with other children, for a walk in the woods, the boys generally came out holding sticks and rocks and the girls came out holding flowers. Is that an anti-feminist thing to say? (Actually, it’s very much “third-wave” feminism.)

    Summers’ problem was that he said what he did, not as some easily ignored weirdo professor, but as president of the academic institution at which the conference was held. Within the context of his position, it was an incredibly damaging and hurtful suggestion, something that he has never fully understood no matter how many times he apologized.

  • walden

    I posted without seeing 3rdPeriodPoints’ contribution, so consider mine above somewhat redundant.

  • scone

    Or, to sum up, many economists don’t know much about economics, and some scientists have absorbed the sexist prejudices of their culture, regardless of their gender. The common thread here is a lack of intellectual rigor, a lack of objectivity, and a transparent desire to parrot back any nonsense that enables them to maintain thought control. The power elites and the intellectuals who support those elites have utterly failed humanity as a whole, while serving themselves all too well.

  • AWF

    Jamie Dimon?…didn’t he invent 3 Card Monte

  • Dimm

    Great Post.
    Unfortunately for the president the team was probably chosen by the big business before he won the election ( we will give you x of $, you will get elected, but you have to …).

  • F. Beard

    OT:

    “You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.” from http://www.bloomberg.com/news/2010-09-20/berkshire-s-munger-says-cash-strapped-should-suck-it-in-not-get-bailout.html [bold added]

    Notice that bailing out everyone is a possibility like I’ve been saying for a while. Why not? It is only electronic bookkeeping entries. ref: Deuteronomy 15, Leviticus 25, Deuteronomy 23:19-20

  • NYShooter

    Larry Summers is to Obama as Mark Penn was to Hillary.

    Her campaign didn’t “take off” untill she got rid of that genius; let’s hope the analogy holds true now that Larry suddenly got the urge to “spend more time with his family.”

  • quark

    The inability of President Obama to live up to his campaign promises albeit marginally one coupled with his inability to adjust to ‘conditions on the ground’ relative to the economy and the unemployed while not requiring industry to take responsibility to employ the citizens of this country is not acceptable and he has lost my support an countless others. It is unfortunate. The power structure of this country has been desensitized to the conditions of the population. While this country tolerates 10=18% unemployed…I don’t believe the citizens will tolerate this rate going above 20%.

    What occured in 2007 and 2008 is that the GOVERNMENT ie: CITIZENS stepped into the breach and saved this country from economic ruin by taking extraordinary steps to support the MMF, the corporate paper market and amazingly reached across the Atlantic and guaranteed the LIBOR market.

    This action has temporarily rescued the banks, the brokerage companies, many American corporations and the citizens savings via the partial recovery of financial assets across the board.

    And now President Obama is considering appointing a corporate CEO to the position of Chief Economic Advisor to replace Larry Summers thereby replacing one rat for another.

    Expatriate what savings you have left.

  • Rob

    Are you implying that the government should run a revenue neutral budget each year, or as close to it as it can get?

  • boatman

    as long as you have to sell your soul for money to get elected, we will have leaders like these to appoint leaders like these

  • Rob

    The HuffPo crowd likes Robert Reich and Paul Krugman. What do you think of these two?

  • glenn

    The federal government wasn’t running a profit during the Clinton years of budget surplus! The US government was still carrying a large amount of debt at the time and I presume paying off that debt with the surplus.

    Only when the debt is paid off could it be considered profit and there’s nothing wrong with having some kind of savings account so that you don’t always have to borrow when revenues dip.

  • http://www.pragcap.com TPC

    I think a small to moderately sized deficit is generally acceptable considering our economy.

  • http://www.pragcap.com TPC

    They are too far left in my opinion. I have a huge amount of respect for their work, but they have a tendency to let politics get in the way too often.

  • F. Beard

    They are too far left in my opinion. TPC

    Agreed, but unless capitalists learn how to do capitalism “right” then the leftists will prevail.

  • Michael Covel

    The larger issue is the mental hands off approach Americans have taken toward elections. As long as they are promised three hots and a cot (and social security, health-care, free money and other assorted goodies that aren’t really doable), they will elect anyone and then forget about them. That is until things turn south and then they elect the other side who happens to be standing there. Wash, rinse, repeat.

  • slightly_skeptical

    Either of them would be disasterous. I echo the “They are too far left” opinions. If we want to have a state controlled economy and a bigger welfare state, these are the guys you would choose.

    Here is what Reich thinks are the solutions to end the great recession:
    http://www.nytimes.com/2010/09/03/opinion/03reich.html?_r=2&pagewanted=1

  • vol-trader

    TPC,

    This may be the wrong thread to ask this question in, but I thought I’d bring it up because of your statement that the gov’t should run a slight deficit every year.

    Can an economy grow without the gov’t running a deficit? If they don’t, isn’t the amount of money in the system fixed? Therefore any industry or company’s gain would be another’s loss. Maybe you could do a post on how, exactly, an economy grows?

    thanks

  • David

    Great article….I would add this from an NPR interview with Nancy Pelosi I heard yesterday. How can we have any hope that someone saying this kind of nonsense could possibly create legislature to help us? Specifically, her comments about the tax cuts is mind-boggling.

    http://www.npr.org/templates/story/story.php?storyId=130024991

  • http://www.pragcap.com TPC

    Vol,

    I don’t really care about the whole “off topic” thing. So long as people aren’t bickering with one another like children, feel free to talk about or ask whatever you please on any thread.

    The economy can certainly grow without a govt deficit. The private sector does not NEED the public sector to innovate, create and grow. The problem is balancing the level of money in the system with output. If we have too little (think the 90’s) and growth is very high the private sector will likely go into debt attempting to offset the cash they can’t actually get their hands on. Even worse, if output is low and govt spending is high there is the potential for misallocation. Lots of moving parts here.

    The easiest way to think about this is to use the island example. If I bring 5 friends to my island and force you to use my currency then I have to issue enough currency to meet your daily needs. If you have children and the population grows I have to account for that. People bitch and moan about a steady increase in the money supply without realizing that a certain % of this is entirely due to population growth and just general every day demand for paper money (or electronic, whatever you want to call it) that is required to transact.

    So no, it’s not a requirement that govt spend, but I think they can and do do good things to help prod the private sector along. But in a broader sense, your original point is a good one. If the US govt just stopped issuing currency eventually the private sector population growth and economic growth would require more cash in the system. This isn’t some grand govt conspiracy to steal our net worth via monetary inflation. It’s just a fact of life.

  • http://www.pragcap.com TPC

    She’s such a polarizing figure. It’s not good for anyone. It’s like having Terrell Owens on your football team. Sure, he might be super talented, but at some point his polarization just backfires on you.

  • The Banker

    You must be new here.

  • vol-trader

    Me being a Bengals fan, I am waiting for the inevitable TO melt-down.

  • http://www.pragcap.com TPC

    Yes, I say that, but I was really hoping the Skins would pick-up TO in the offseason. Call me a masochist I guess.

    You gotta be happy about getting by NE and BAL with a split, huh?

  • slightly_skeptical

    TPC, not sure I agree that there’s no need for government debt to grow the economy – not temporarily, but longer term. Do we not need new government money put into the system to fund interest on private as well as public debt. The island example does not consider interest on debt nor does it consider a net deficit in exports. If China, Japan, etc were not buying our treasuries what would they be buying with those USDs?

    I’m of the opinion we need government debt to fund the interest and trade deficits in the long term, otherwise the credit growth has to inevitably contract. It is true that the government has deficit spent less than credit growth over the last 20 years or so than credit creation, but that’s exactly how we got the bubble – unsustainable and why the government is now over spending – to try and avoid the death spiral.

    Don’t get me wrong I’m against all this i.e. huge government deficits, but isn’t this is how the financial machine we’ve created works? No new government debt, no sustainable growth.

    Just like the government needs to spend first to allow folks to extinguish taxes levied on them, if there’s no new government money being pumped in how do you extinguish interest on debt? Credit expansion can only last so long before new government money is required, no?

  • slightly_skeptical

    If China, Japan, etc were not buying our treasuries what would they be buying with those USDs?

    BTW, no need to answer this question, it was rhetorical.

  • slightly_skeptical

    “Maybe you could do a post on how, exactly, an economy grows?”

    TPC, I think that’s an excellent request from vol-trader, I’ve been pondering this same question myself. The conclusion I’ve come up with is yes we do need new government debt to grow with the assumption being we have the economic system Treasury-Fed FIAT based money setup we have today. If the Government had not being injecting new money into the system how did we go from being a $100 billion dollar economy in 1942 to $14.7 Trillion economy today. I know there’s credit/debt creation, but at some point interest on the credit/debt needs to be paid back, where’d all the new money come for that?

  • Firts

    “If the US govt just stopped issuing currency eventually the private sector population growth and economic growth would require more cash in the system.”

    Growth is not money. The money would simply have more buying power.

    In an all cash economy if there was no growth in the money supply production can certainly increase the money valuation would simply increase a so would the buying power. On TPC’s Island those 5 friends are “forced” to use is currency and he issues enough currency to meet there daily needs but instead they could very well be bartering goods and services and not have to share there production with the currency issuer ho happens to also be the taxmen. As there population grows they could chose to use a medium or several medium.
    The real problem is more that we are in an all credit economy so that a stagnant money supply would make it very difficult if not impossible to pay back debts. It is not necessary to operate an economy with so much credit it does permit growth but it as now extended to such a disproportionate level that the benefits are offset by its cost. The lenders Banks have had a Bonanza but now they are caught at there own game.
    Let’s face it the Fed is not trying to stimulate the economy it is trying to avoid a disaster by somehow extending this credit.
    Look at the financial sector ratio of the US economy. When the US was a manufacturing country credit was not so available. Corporation made there money selling there goods instead of making it from financing there clients purchases. This also as been a pyramid of easy credit to purchase other country’s goods.
    Increasing Government spending and the money supply could work if there was an over production with in the US but printing money to purchase Chinese Goods will not work twice.
    Since credit precedes production it’s a balancing act and eventually we must produce more to rebalance this equation. The balancing act equals the extravagance. This one was historic.

  • Cowpoke

    The US Govt has basically three routes of monetary policy it can take.
    Private, public and a combination.

    When the policy is all private, then there will be those that claim “MONOPOLY”

    When it is all public, then there will be those that yell “Communism”

    When it is a combination, the other two sides yell foul.

    I personally think that economics with regards to a nations economy is a Pseudoscience.

    When human natures regard for self sustenance is involved in the mix, then all bets are off with regards to any sort of rational economic policy.

  • Firts

    a Pseudoscience. Govt and the economy.

    In sport we do need a referee but we let players play to the best of there abilities the refereere does not starts playing or taking sides like Governments do with there subjects.

  • slightly_skeptical

    Thanks Firts.