Where’s Volcker?

Marshall Auerback here.

Unlike Ed, I like to call a spade a spade regarding the Obama Administration’s economic gurus. The more they screw up, the greater the number and depth of the crises, the greater the responsibility/ power Obama gives them. I wonder what he’d do if they ever succeeded? You can’t assume independent probabilities when you have the same actors making policy (and not learning from their past mistakes).

More broadly, you can’t assume independent probabilities even with different policy makers if they share the same theoretical priors and methodological blinders. It is very worrying is that neither Geithner, nor Summers display any obvious remorse or sense that they made contributed to the current mess, thereby making it impossible to believe that they actually understand how to get us out of it. It reminds one of George W. Bush’s reluctance ever to acknowledge an error (and look where that got us).

Geithner and Summers are far more likely to doom Obama’s Presidency. There is no hope for Obama if he continues to embrace neo-Rubinism as his governing creed.

The Obama administration’s budget bears the hallmarks of a decade-old alliance that has quickly come to dominate the most pressing issues on the young administration’s agenda.

Treasury Secretary Timothy F. Geithner and National Economic Council Chair Lawrence H. Summers pushed for weeks for a strict cap on the nation’s debt. And while other advisers argued that the administration needed a more flexible spending plan, they could not deter the president from ultimately agreeing with the views promoted by the partnership of Geithner and Summers.

The approach advanced by the two men proved formative, providing White House budget officials the critical guidepost for the overall spending plan, an administration official said. When the pair team up in policy debates, as they often do, they are a potent force within the administration, officials said.

Geithner and Summers are also taking the lead in shaping the Obama administration policies for creating millions of jobs through the economic stimulus plan, rescuing the banking system, revitalizing the housing market, restructuring the auto industry and overhauling financial regulation.

Obama’s decision to make Summers and Geithner the key players in such a wide-ranging agenda has left some within the government concerned that they will be unable to handle so many complex issues at once. Geithner already was widely criticized on Wall Street for being too vague when he announced the financial rescue package last month.

Geithner said the crisis has left the administration little choice but to tackle every problem head-on. Last week alone, Geithner ran from meeting to meeting to craft a new rescue deal for Citigroup, talk with governors on the economic stimulus package, co-host a summit on the nation’s fiscal issues, work with lawmakers on regulatory reform, refine a plan to help homeowners, discuss a major upcoming summit with his foreign counterparts and roll out the details of a “stress test” for banks.

“Time is not on our side,” Geithner said in an interview. “I really deeply believe that this will be a much more damaging crisis unless we move as quickly as possible on each of these fronts, and that’s forcing us to do more at once than you would normally do. . . . But we got dealt this hand, and we are just making a conscious judgment that you have to move all these fronts together and take the initiative.”

Geithner and Summers first joined forces in the late 1990s at the Treasury Department to confront financial meltdowns in Mexico and Asia. They forged a friendship, often losing themselves in esoteric policy debates that would carry over as their careers progressed and even during their vacations together at a tennis camp in Florida. (Summers conceded that Geithner beats him “more than half the time” on the courts, but said, “I am better age- and physique-adjusted”).

“I’m struck in meetings by the fact that when Tim says something, it was exactly what I thought needed to be said,” Summers said. He added that they can often finish each other’s sentences and communicate through a single glance. “We often look at each other and the look says, ‘What somebody is saying isn’t really viable in both of our views’ or . . . ‘that basically feels right.’ ”

For a brief time late last year, relations turned awkward between Geithner and Summers, a source familiar with their interaction said. In November, Summers wanted to become Treasury secretary, a job he’d held under President Bill Clinton. Geithner offered to stay in his post as president of the Federal Reserve Bank of New York, one of the sources said. Obama’s transition advisers were divided over whom to choose.

Ultimately, Obama made the call to bring them both to Washington. He approached Summers to be the chairman of the National Economic Council. Initially, “it was a big disappointment to Larry,” the source said. But he quickly came around as he understood the advantages of being in the White House and having access to the president.

Some Democrats predicted Summers’s position in the White House would create problems for Geithner, but Geithner said it has been the opposite.

“It’s better for me to have someone [at the NEC] who has been in this job, because there’s a lot to do and because he’s uniquely sensitive to the things you want to preserve at the Treasury,” Geithner said. “I don’t think I would have done this without Larry in that job at this time.”

By all accounts, Obama has come to rely heavily on their advice, especially that of Summers. Before he spoke to Congress last Tuesday night, he gave Summers and Geithner several drafts of the speech and asked them for feedback.

The influence of their partnership was also evident during the battle over the budget, which began weeks before Obama was sworn into office.

Meeting in January on the eighth floor of the transition team’s office in downtown Washington, Geithner pressed the incoming president to commit to cutting the deficit to 3 percent of the economy over the next five years, which would keep the nation’s debt roughly in line with normal economic growth. Summers quickly backed him.

Some, including economist Jared Bernstein, resisted, saying that such a strict limit would make it more difficult to confront the many challenges ahead and that the size of the government’s emergency response to the economy and financial markets would make the cap tough to maintain.

In February, the entire economic team convened in the windowless Roosevelt Room in the White House. Obama abruptly ended the debate. Geithner and Summers would have their way.

“The two of them being together ended up being pretty decisive for President Obama,” an administration official said.

Geithner and Summers have brought a change to the way policy is debated within the government, according to officials who have worked with both the current team and the Bush administration.

Former Treasury Secretary Henry M. Paulson Jr., who hailed from the Wall Street giant Goldman Sachs, ran his agency more like a corporation. He often sought quick decisions, the officials said, and was faulted for lurching from one plan to the next. Paulson also operated fairly independently, with little White House interference.

Geithner and Summers prefer a more academic environment, where lengthy debates are fostered within the Treasury and between the agency and other key administration officials.

Some government officials expressed worries about the approach of Geithner and Summers to the financial rescue, saying it has left investors unsettled because they do not understand the administration’s intentions. But the decision to withhold details was made consciously by the two men, who believed it was more important to come up with the right plan than to respond to every move of the markets, administration officials said.

Geithner has not given “a level of detail that would be to the detriment of the government’s credibility later,” Summers said, noting that “previous administrations too often tried to give transient confidence to the markets.”

While the markets await further details, the Treasury has stated that it would stand by the nation’s banks and not let any of them fail, Geithner said.

The pair’s hectic schedule is taking its toll.

Complaints are growing that having so much authority centralized in Geithner and Summers is creating a chokepoint, preventing key constituencies from being heard. The automakers and their parts suppliers said they struggled to get an audience with the pair, despite the fact that their enterprises are facing the prospect of running out of money if they do not receive federal aid in a matter of weeks. Executives from these firms eventually met with Treasury officials last week.

Several administration officials said the lack of staff at the agency has exacerbated the problem. So far, every key position within the Treasury, with the exception of Geithner, remains vacant or awaits confirmation. The administration has not forwarded these nominees to the Senate Finance Committee because the White House is carefully vetting every candidate to avoid the kind of embarrassing tax problems that dogged Geithner and other nominees, government sources said.

Treasury officials added that the agency is facing difficulties recruiting financial experts because of a new lobbying rule imposed by the administration that would prevent them, if they leave government, from contacting it while Obama remains in office. “It’s really tied their hands at Treasury,” a congressional staff member said.

Summers agreed the workload has been heavy. “I wouldn’t say it’s a period where I’ve gotten the most sleep,” he said. “But I would argue that there’s nothing we’re taking on that hasn’t been essentially foisted on us by events.”

Source
On Economy, Two United Voices Steer Obama Agenda – Washington Post