Larry Summers Won't Get The Chance To Fail at The Highest Level

He has withdrawn from consideration to be chair of the Federal reserve in response to growing pressure against his nomination. Absolutely fantastic news:

Former U.S. Treasury Secretary Larry Summers has removed his name from consideration for Federal Reserve chair, The Wall Street Journal reported on Sunday.

Summers notified President Barack Obama on Sunday via phone call, and sent a letter shortly after.

"I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation's ongoing economic recovery," Summers said in the letter.

In recent weeks, Democratic leaders have warned against a Summers nomination; a Senate aide said the move would lead to a "very tough" fight for Senate confirmation. As it stands, Democrats only have a two-vote majority on the Senate Banking Committee. With assumed opposition from Sens. Elizabeth Warren (D-Mass.), Jeff Merkley (D-Ore.) and Sherrod Brown (D-Ohio) and a recent announcement of opposition from Sen. Jon Tester (D-Mont.), a Summers confirmation faced an uphill battle.

When rumors of a Summers nomination began to pick up in late July, Obama gave a "full-throated defense" of the former secretary in a closed Senate meeting. A Democratic lawmaker at the meeting said the president ripped The Huffington Post for making Summers "a progressive whipping boy," telling Democrats "not to believe everything you read in The Huffington Post."

Obama also faced opposition from a coalition of progressive groups who began to speak out against a Summers nomination once speculation started to gain traction. MoveOn.org, CREDO, The Other 98%, Democracy For America, UltraViolet, the Campaign for America's Future, DailyKos, the National Organization for Women, Mike Lux's American Family Voices and Color of Change were among those involved in the coalition.

I strongly believe that Summers was Obama's first choice, and that the only reason he has withdrawn is that our pressure has worked. People mobilized hardcore against summers, and this was a real victory.

Alex Pareene makes a good point here:

The volume and strength of liberal opposition to a potential Summers pick seemed to surprise both Summers’ allies and liberals unused to Democrats ever actually successfully challenging Democratic presidents from the left. But once three Democratic Senators on the banking committee all said they’d vote against Summers, it became clear that his nomination would be a circus. And a pointless circus, because there have been, this whole time, numerous highly qualified and entirely uncontroversial choices to run the Fed.

Summers’ supporters now moan that the president didn’t do enough to “push back” against the anti-Summers campaign. All the White House did was dispatch the president to personally try to sell lawmakers on Summers, plant numerous stories praising Summers in the liberal and nonpartisan press, and repeatedly claim that the most prominent other candidate for the position, Janet Yellen, was insufficiently manly. The problem wasn't a lack of effort on the president’s part, the problem was the entire professional history of Larry Summers.

And why wouldn't they be shocked? The Obama administration has seen almost no liberal campaigns against them like the one they did with Summers.

It's a reminder of how to win things. Real pressure on Obama, outside actors/groups constantly raising
hell, leading to several senators saying they'd vote no and making his confirmation impossible. Don't pay nice, make sure there is a political price to be paid for something and people will take you seriously. You might even convince them that it isn't worth the effort. That's what happened here, and it's the lesson for the future: Outside pressure works.

No To Larry Summers At All Times, For Any Position

Larry Summers is apparently the Frontrunner to replace Ben Bernanke as Fed Chairman. I've spent plenty of time on this blog discussing my dislike of Larry Summers, but there is no need to not read David Dayen's similar minded take on the situation:

Summers would get the nod over the previous favorite, Fed vice chair Janet Yellen, in part because top-level officials have stressed to the President that Yellen is somehow “not strong enough” for the job, and would subsequently lack the confidence of financial markets. This gender-coded whisper campaign against the woman who would become the first female Fed chair in history is in line with an undercurrent of sexism about the selection — and the fact that Summers has an unfortunate history on this, from infamous comments he made while President of Harvard University (alleging there exist “innate” scientific aptitude difficulties for women) just amplifies the potential problem for the White House with its liberal base.

...

The Fed’s biggest preoccupations at the moment are 1) whether to continue monetary stimulus to prop up an economy that remains ailing, and 2) whether to implement financial regulations from the Dodd-Frank Act in a way that is adversarial or friendly to Wall Street.

On the first count, Summers’ public statements on the economy since leaving the Council of Economic Advisers in 2010 have largely been confined to fiscal policy, something that would be out of his reach as Fed chair (and which is also stuck due to Congressional gridlock). For what it’s worth, the Administration is confident that Summers would take seriously the full employment mandate of the central bank. But sources close to the situation worry that Summers would be more likely than Yellen, an inflation dove, to prematurely pull back on quantitative easing measures, and more important, become accepting of the current high levels of unemployment, without experimenting on bolder measures. Inflation would remain the primary Fed concern, a benefit to bankers, rather than full employment.

Summers’ true position on monetary policy is more conjectural (actually a problem when putting someone into a position of running monetary policy). But there’s no question that, on financial regulation, Larry Summers has perhaps the worst track record of any major economic figure in America. And the Federal Reserve plays a key role, perhaps the primary role, in regulating banks. Led by point person Daniel Tarullo, the Fed has recently doubled leverage requirements for the largest financial institutions. It’s hard not to see the Summers pick as designed to babysit Tarullo, and blunt any policies that come down hard on the banks. Tarullo and Summers are personally close, but Summers typically listens to his own set of sources on financial regulation – the ones in the very expensive suits – and this has had disastrous consequences for over 15 years.

In the 1990s, Summers and then-Treasury Secretary Robert Rubin led the effort to stop Brooksley Born from regulating derivatives, precisely the financial instruments that magnified the housing bubble and accelerated the financial collapse. Under his watch as Treasury Secretary, Congress eliminated Glass-Steagall’s firewall between commercial and investment banks, legalizing the merger of Citigroup (where Rubin would later become CEO). He further oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, even from state anti-gambling laws. Even Bill Clinton has apologized for deregulation of the riskiest sector in finance; Summers has not. Even well after the crisis, in 2011, Summers pronounced himself “more cautious than many about constraining financial innovation,” a not-so-thinly veiled code for encouraging a return to casino activity on Wall Street.

After contributing to the crisis, and then losing $1.8 billion for Harvard by investing most of their cash reserves in an endowment stuffed with risky trades, Summers denied the existence of the housing bubble. At the Federal Reserve annual conference in Jackson Hole, Wyoming in 2005, right before the crash, economist Raghuram Rajan warned of the imminent catastrophe in a formal paper, arguing that excessive risk-taking had surged, and that the banking system faced a “full-brown financial crisis” from the sliver of toxic securities on their own books. Larry Summers was the first to stand up and attack Rajan, bellowing that he found “the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be misguided.” Incidentally, Janet Yellen spoke publicly about the risks of the housing bubble around this same time.

In short, if we wanted to pin the crisis on one person, Summers would be a viable candidate. Nontheless, he failed upwards by taking a lead position on the Obama economic team, and the man responsible for much of the financial crisis would set to fix it. He predictably failed again. Summers lowballed the estimate of how much stimulus would be necessary to get the economy back to full employment; he lied to key members of Congress about the Administration’s commitment to providing housing debt relief and support for cram-down, where bankruptcy judges would be empowered to rewrite the terms of mortgages (this never happened, as the White House withdrew support and created a mortgage relief program that has massively underperformed); and he stood mute about monetary policy efforts to turn around the economy, which would be his main area of impact at the Fed. So on fiscal, debt relief and monetary terms, when the economy was reeling and everything counted, Summers missed on all three.

Larry Summers has been wrong about so much that his failing upwards is kind of the perfect symbol for how fucked up our economic policy has been for the past 20 years. Let's not make it worse.

The Larry Summers Experience

Larry Summers has always been a frequent target here, mainly because I find it annoying that people ignore his extremely dodgy track record because he is a "brilliant mind", or something.

The size of the stimulus has always been a issue of debate. At the time, many of the economists whose judgement I trust (because they aren't constantly wrong about things) strongly criticized the stimulus as being not large enough, and being too focused on tax cuts rather than the more stimulative options at their disposal. In the months and years since it's become painfully obvious that they were right and Summers (and the administration) were wrong, there have been two main for why they screwed up. The 1st excuse that no one thought it was too small and fully understood how bad the economy is so wrong and easily disproved it's not worth discussing.

The second excuse is that political constrains forced a smaller sized stimulus than the administration would have otherwise wanted. This excuse was always hard to disprove since you can't know exactly how those meetings went, but it always seemed odd to me that Summers, Obama's lead economic adviser, would be including political considerations into his analysis.

In an interesting article in the New Yorker on Obama's first term, we get our answer:

Since 2009, some economists have insisted that the stimulus was too small. White House defenders have responded that a larger stimulus would not have moved through Congress. But the Summers memo barely mentioned Congress, noting only that his recommendation of a stimulus above six hundred billion dollars was “an economic judgment that would need to be combined with political judgments about what is feasible.”

He offered the President four illustrative stimulus plans: $550 billion, $665 billion, $810 billion, and $890 billion. Obama was never offered the option of a stimulus package commensurate with the size of the hole in the economy––known by economists as the “output gap”––which was estimated at two trillion dollars during 2009 and 2010. Summers advised the President that a larger stimulus could actually make things worse. “An excessive recovery package could spook markets or the public and be counterproductive,” he wrote, and added that none of his recommendations “returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions—which would likely not accomplish the goal because of the impact it would have on markets.”

Paul Krugman, a Times columnist and a Nobel Prize-winning economist who persistently supported a larger stimulus, told me that Summers’s assertion about market fears was a “bang my head on the table” argument. “He’s invoking the invisible bond vigilantes, basically saying that investors would be scared and drive up interest rates. That’s a major economic misjudgment.” Since the beginning of the crisis, the U.S. has borrowed more than five trillion dollars, and the interest rate on the ten-year Treasury bills is under two per cent. The markets that Summers warned Obama about have been calm.

There are no excuses for Summers. He was tasked with proposing what the economy needed for a turnaround, and was spectacularly wrong. I'm sure the Summers defenders will find a way to make "major economic misjudgment" another example of his genius, but for those of us who prefer to look at his actual record of policy beliefs and actions, it isn't a pretty one.

For most people, a screw up of that magnitude would cost them their jobs. For Larry Summers, he gets recommended for a more prestigious one.

This is Significant

One of the free market fundamentalists in the picture above now supports the nationalization of US banks.

(Hint: It's not the one who works in the white house)

Former U.S. Federal Reserve Chairman Alan Greenspan said on Tuesday that the global recession will "surely be the longest and deepest" since the 1930s, adding that the Obama administration's Troubled Asset Relief Program will be insufficient to plug the yawning financial gap.

. . .

"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," he said. "I understand that once in a hundred years this is what you do." Nationalizations would "allow the government to transfer toxic assets to a bad bank without the problem of how to price them."

There's pretty much an across the board consensus that many of these banks are insolvent, and that the government will have to take them over.

It's only a question of how much time and money will be wasted waiting for ideologues like Summers and Geithner to come to terms with the facts.

The Geithner "plan"

We start with this from yesterday's New York Times:

WASHINGTON— The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

Those paragraphs should send chills down the spine of anyone who knows Geithner's track record in his previous endeavors. And besides being a vague plan headed by someone that I zero faith in, the stuff he did reveal isn't great either.

In an post criticizing the plan, Bob Borosage explains first explains the banking crisis in as well as I've seen anywhere:

The plan isn't likely to get the administration where it needs to go for two simple reasons. It is wrong about where we are starting from. And it is wrong about where we're going to. If you don't know where you are and don't know where you are going, it is very hard to get there.

The plan won't admit where we are: the major banks in the US are insolvent. They aren't addled by a temporary fever. They are broke. If they actually marked their toxic paper to the market price - where there is one - their losses would wipe out their capital, even including the billions kicked in by the government in the first round. Clearly, the Obama administration - like the Bush administration before it - hasn't accepted that reality.

Further explination from an email to the politco:(via Ezra)

An oft-quoted investment banker e-mails us: “There is no capital in the entire global financial system. None. When I say ‘financial,’ I mean banks, hedge funds, private equity funds, homeowners and other leveraged players. There is some capital among the ‘real money’ players such as sovereign wealth funds and central banks. And the U.S. can ‘print’ some. But that's it. … The problem with the distressed assets is not that there are no buyers. There are plenty of buyers; I speak to them every day. The problem is there are no sellers; that is, the banks won't sell. Because to sell is to book a loss on what you have sold and what remains. And to do that is to die. That's what it means to be insolvent.”

Borosage continues on about why Geithner's plan isn't designed to fix the problem:

The plan won't get us where we need to go: we need to restructure - and downsize - our financial sector. Its baroque excesses - billions in bonuses, golden parachutes, million dollar office renovations, $35,000 "commodes on legs," $50 million private jets, legions of employees - were constructed atop a housing bubble that finally burst. Now the banks and financial houses must be downsized, chastened, and regulated. As President Obama stated, "the party is over." But the administration's plan envisions a restoration, not a restructuring. We don't want to go there even if we could afford it.

Martin Wolf, the lead economics writer for the establishment Financial Times, notes that the plan was constrained by three assumptions: no nationalization, no losses for bondholders, no new money from the Congress.

No nationalization rules out the way the US normally deals with insolvent banks. The FDIC takes them over, replaces the management; the depositors are reassured, the shareholders take their losses to write off the bad debts. Then the FDIC restructures the bank, merges it or sells it back to private investors. It arranges an orderly and seemly burial. Without doing this with banks that are "too big to fail," the administration is left paying tribute to zombie banks that consume taxpayers' money while doing little if any productive banking.

No losses for bondholders means that taxpayers pick up the bill. With an insolvent bank, shareholders lose their investment. That's how the market works. If that isn't enough to cover the losses, then creditors take what is called "a haircut." A portion of the loan they made to the bank is written off or turned into equity (stock). But with neither the shareholders nor the creditors taking the hit, only taxpayers are left.

As dire as this sounds, the hope is that while Obama has ruled out nationalization, and it goes against everything that Tim Geithner and Larry Summers believe in, they may not end up having a choice.

The question becomes when they realize that it needs to be done, and how much taxpayer money we've thrown away while waiting for them to figure it out.

What the hell is going on here?

In a shocking but awesome development, there appears to be some legit and public push-back from democratic senators on the crappy aspects of Obama's stimulus plan. (Via Open Left)
Tom Harkin:

"There's only one thing we've got to do in this stimulus, and that's create jobs," Harkin told me. "I'm a little concerned by the way Mr. Summers and others are going on this ... it still looks a little more to me like trickle-down."

Likening Barack Obama's economic recovery plan to the failed supply-side excesses of the Reagan and Bush years is a bit of a Cassandra moment. But Harkin didn't back down. "What I'm hearing from Mr. Summers is that they've got a different approach -- tax breaks, and this and that," he said. Harkin warned that, much like the outcome of George Bush's $600 stimulus package last year, recipients of quick tax cuts "are going to be salting it away, not spending it."

Pushback like this is very important in getting better policy and letting Obama know that pressure from the left exists. The good news in this is the positive response that the Obama camp has had to the criticism:

“Obviously, it’s a big answer to a big problem and there are a lot of component parts to it,” Mr. Axelrod said in an interview after meeting with balky Senate Democrats. “These folks are not potted plants. They’re elected officials, and they’re doing their jobs.”

He added, “It’s a collective process, and we’re willing to listen to people’s ideas.”

Asked if they were willing to adopt people’s ideas, Mr. Axelrod said: “We’ll see. It depends on the idea.”

Obama himself:

My staff and I have been engaged in a constructive dialogue with members of Congress over the last few days and weeks about my American Recovery and Reinvestment Plan which will save or create at least 3 million jobs, and make long-term investments in the critical areas of energy, health care and education. We have made good progress in these consultations, and I look forward to working closely with Congress to shape legislation that will work for the American people.

Even the walking-talking human shaped feces that is Larry Summers got in on the act:

Mr. Conrad, who described the meeting as extremely positive, said Mr. Summers ended it by telling the senators, “Message received, loud and clear.”

I guess someone forgot to tell Barack Obama that criticism of his policies hurts him and should only come after he solved all of our serious problems. If people were trying to undermine my presidency, I sure wouldn't be encouraging them to do it further.

In all seriousness, I'm floored by the willingness of the senate democrats to tell Obama that parts of his plan are bullshit, but I'm equally impressed by Obama's openness to the criticism. We don't know if it will change the plan, but it's a very good thing that this type of back and forth is even taking place.