One problem with the economic team Barack Obama presented on Monday in Chicago is that it includes people whose cultural background is directly opposed to what it should be, and to what Obama promises to do. Much has been said about Larry Summers, directly responsible for the banking and insurance deregulation of the Nineties, as The New York Times pointed out today:
As treasury secretary in 2000, Mr. Summers championed the law that deregulated derivatives, the financial instruments — a k a toxic assets — that have spread the financial losses from reckless lending around the globe. He refused to heed the critics who warned of dangers to come. That law, still on the books, reinforced the false belief that markets would self-regulate. And it gave the Bush administration cover to ignore the ever-spiraling risks posed by derivatives and inadequate supervision.
Mr. Summers now will advise a president who has promised to impose rational and essential regulations on chaotic financial markets. What has he learned?
Even more interesting is the case of Christina Romer, a professor at the University of California, Berkeley, who apparently was not shy to offer her Greenspan-like ideas as late as September 2007, when sensible economists such as Dean Baker and James Galbraith already sounded the alarm.
John Judis, senior editor at The New Republic, points out that Romer, in a paper about economic policy in the Sixties, wrote:
In my opinion, better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle in the last 25 years. In this area, the policy mistakes of the 1960s were a painful, but not permanent, detour on the road to excellent economic performance.
It must be remembered that "the road to excellent economic performance" has been paved by Federal Reserve-created market bubbles, and that these bubbles, in the end, have provoked the crash which is under our eyes. Maybe the "virtual disappearance of the business cycle" was, well, "virtual," and the real cycle came back with a vengeance, in the form of today's downturn (even after the gains of the last two days, the S&P500, is down forty per cent compared to one year ago). But let's read more:
Overall, the story of stabilization policy of the last quarter century is one of amazing success. We have seen the triumph of sensible ideas and have reaped the rewards in terms of macroeconomic performance. The costly wrong turn in ideas and macropolicy of the 1960s and 1970s has been righted and the future of stabilization looks bright.
In 2008, the "future of stabilization" has been all but bright (and not even acceptable) simply because economists of Romer's mind frame, obsessed by balancing the budget, and keeping a tight control over money supply, completely ignore the dangers of the new financial instruments proliferated during "the triumph of sensible ideas."
Now, confronted to a crisis of big magnitude, Barack Obama has promised a large program of building infrastructures, giving tax-relief to middle-class families, financing a "green revolution" in the field of energy, all things that will cost an enormous amount of money on top of what the federal government is already spending. What does Romer say about that?
On the idea that persistent deficits don’t matter, I think there is widespread consensus that that too is not true. There may be differences in our estimates of the size of the eventual effects, but most economists agree that deficits over decades unquestionably reduce national saving and have consequences for long-run standards of living.
And Romer, parroting the discredited economic theory that public investments financed by deficits "crowd out" private investments, continues:
at some point, the debt burden reaches a level that threatens the confidence of investors. Such a meltdown and a sudden stop of lending would unquestionably have enormous realconsequences.
Indeed, a "meltdown and a sudden stop of lending" materialized last September, but the cause was definitely not the debt burden of the public sector, quite the opposite: it was the collapse of trust inside the private sector that triggered the crisis.
Seasoned political reporter E. J. Dionne has a piece in Real Clear Politics, where he quotes an Obama's close adviser: Obama "feels very strongly that this is not just a short-term fix but a long-term retooling of the American economy, [he] has a holistic view of the economy. Health care is going to be part of it, and so will green energy investments, education reform and a new approach to regulating financial markets."
So, the question is: what will Romer do as chair of Obama's Council of Economic Advisers? Answer: she will do her best to discard this "holistic view", eviscerate Obama's agenda, and promote Ronald Reagan's and George W. Bush's catastrophic economic policies.
So, the question is: what will Romer do as chair of Obama's Council of Economic Advisers? Answer: she will do her best to discard this "holistic view", eviscerate Obama's agenda, and promote Ronald Reagan's and George W. Bush's catastrophic economic policies.
