Wednesday, January 20, 2010

Summers and Geithner Must Go! (Part I)

The debacle in Massachusetts highlights the severe political costs of the Obama Administration's ill-founded approach to the economy and financial regulation. Certainly a stronger candidate would have done wonders for the Dems, but it is equally certain that the national mood is turning against the Dems, perhaps rapidly. The Coakley pollster (supported by GOP polls) clearly has a sound basis for claiming that Obama's gentle policy towards Wall Street while ignoring Main Street was not helpful.

In my view, President Obama out-sourced economic and financial policy to the "experts," Robert Rubin clones Lawrence Summers and Timothy Geithner. They dominated policy to the exclusion of voices such as Paul Volcker and Christina Romer. Unfortunately, Summers and Geithner pursued policies dictated by their Wall Street roots.

Those policies suck. For example, according to Nobel economist Paul Krugman their approach to the crisis in late 2008 was "just wrong," as they underestimated the size of the stimulus needed and they structured the stimulus to rely too much on ineffective tax cuts. Another Noble economist, Joseph Stiglitz, specifically warned Obama that committing 40% of the stimulus to tax cuts would be ineffective: "Americans confronted with debt, shrinking retirement accounts, houses worth less than mortgages and a tough credit environment will save more of their money than in the past. That was the experience with the February 2008 tax cut, where less than half of it has been spent." Basic economic reasoning suggests that government spending should always seek to generate the greatest benefits per buck, and that the size of the stimulus must be calibrated to the GDP shortfall. Thus, one did not need a Noble Prize to see that at least $1 trillion in stimulus was needed and that the emphasis should be on massive government investment in lieu of tax cuts.

So, why did Obama ignore Stiglitz and Krugman as well as basic economic reasoning?

It appears that Lawrence Summers led the charge on replacing infrastructure investments with tax cuts. According to Rep. DeFazio (see video above): "Larry Summers hates infrastructure." This is the reason the stimulus still looked much like a Bush-Reagan "trickle-down" approach. In fact, as early as 2007, Summers argued for too small of a stimulus that was too focused on trickle-down tax cuts. Bush followed that advice and it failed. Again, Paul Krugman specifically argued against too much in tax cuts and not enough in investment. Apparently, special interests prevailed upon Summers to include a large percentage of ineffective tax cuts. Banks led the list of top beneficiaries.

Summers has legendary connections to Wall Street Banks. He got a free ride on the Citigroup jet. He called Sen. Chris Dodd to have pay caps at banks removed from the stimulus bill. Prior to ascending to the Obama Administration, he was paid $7.7 million by Wall Street interests.

Little wonder the Administration is viewed as in bed with Wall Street.

The bottom line is this: IT'S THE ECONOMY STUPID! Obama needs a new approach, fast.

The President has a stark choice: either he dramatically changes his approach on the economy and financial regulation, or his legacy and the entire Democratic agenda goes down with the banks.

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