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He has withdrawn from consideration to be chair of the Federal reserve in response to growing pressure against his nomination.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I strongly believe that Summers was Obama's first choice, and that the only reason he has withdrawn is that our pressure has worked.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.

Housing Help is Not On The Way

One of the last hopes of a large scale project that would improve people's lives and the economy without the help of congress was using Freddie and Fannie to perform principle reductions on people's mortgages.

That hope died last week when the Director of FHFA, Ed DeMarco, announced his refusal to do so. David Dayen:

The important part is actually what Dylan Matthews notes in passing AFTER this, that Levitin said “replacing him means Obama can’t blame DeMarco for the state of the housing sector.” This is quite right, and you can see it something I tweeted yesterday. James Lockhart left FHFA, making Ed DeMarco acting director, in August of 2009, three years ago. In the total time he has been acting director, there has been a Presidential nominee for the position for roughly two months. The Administration didn’t get around to nominating Joseph Smith – the banking commissioner of North Carolina and currently the enforcement monitor for the foreclosure fraud settlement – until November 2010, during the lame duck session. Smith was denied an up or down vote in the lame duck and he withdrew his name from consideration in January 2011. And that’s been it. There has never been a replacement nominee for FHFA Director since.

The President and the Treasury Department claim that principal reduction and refinancing are priorities (now, after three years of doing nothing toward that purpose; the HAMP principal reduction program did nothing until the incentives got tweaked this year). They claim that they strongly object to DeMarco’s position. They have rallied a large section of the housing advocacy community around to focusing attention on DeMarco, a virtual unknown just a few months ago. DeMarco, in fact, is very useful to the Administration right now. He’s an excellent foil, a means to distract attention away from the terrible housing policies of the past few years. Suddenly it’s Ed DeMarco’s fault that housing hasn’t improved. It’s Ed DeMarco’s fault that you can buy a house for the price of a Lexus in 10 cities in America. DeMarco as cartoon villain puts the guys who have been running housing policy for the last three-plus years in the white hats.

That’s been sold brilliantly, and a recess appointment would mean that Obama would have to take ownership of the policy. There’s a chance that could actually fail. And so, for three years, there’s been a named nominee for two months. This is working out nicely for the Administration.

This is not to say that DeMarco is somehow right. I think Jared Bernstein’s analysis of DeMarco’s flawed analysis is spot-on. And DeMarco re-imagining himself as the executor of all taxpayer funds – by rejecting the cost savings for principal reduction by saying it just moves money from Treasury to the GSEs, as if he has any say over how tax dollars are spent at Treasury – is a breach of jurisdiction and simply a dodge to force an ideological rejection of principal reduction. Will DeMarco stop facilitating home purchases in the suburbs because suburban sprawl forces more hydrocarbon use, leading to increased taxpayer dollars for the Defense Department to secure oil supplies? The whole thing is ridiculous.

But DeMarco knows he won’t be fired. He’s become the symbol in the story, and the Administration is much more interested in symbolism when it comes to housing.

And now, Bailout author Neil Barofsky, someone who actually worked through this whole process with the Treasury department, has also given his take:

Last week the acting director of the Federal Housing Finance Agency, Ed DeMarco, made a familiar argument. He announced that he would not approve the Obama administration’s request that struggling borrowers whose mortgages are backed by Fannie Mae and Freddie Mac receive debt relief through principal reductions subsidized by the Troubled Asset Relief Program (TARP). DeMarco’s refusal was based on his concern that granting such relief would encourage other borrowers to “strategically default” by not making payments on their loan to take advantage of the promise of a reduction in their debt. This is a version of the moral hazard argument we heard about so often in the early days of the financial crisis. Secretary Geithner, in response, argued in a public letter that notwithstanding such concerns, and for the greater good of the overall economy, such relief should be granted whenever it would result in a better economic outcome than foreclosure.

This is not the first time this debate is happening – but last time around, Geithner was the one arguing DeMarco’s points. Although one can argue whether principal reductions are the right way to address the ongoing housing slump – I have championed principal reductions for years but acknowledge that there are passionate arguments on both sides of the issue – no one should be fooled that the administration’s entreaties to DeMarco are anything but political posturing. As I recount in my recently released book, Bailout, during my time as the special inspector general in charge of oversight of the TARP bailouts, Treasury Secretary Timothy Geithner, using the same justifications now offered by DeMarco, consistently blocked efforts to use TARP funds already designated for homeowner relief through a principal reduction program that could have a meaningful impact on the overall economy.

For example, in 2009, $50 billion in TARP funds had been committed to help homeowners through the Home Affordable Modification Program (HAMP), a program that the president announced was intended to help up to 4 million struggling families stay in their homes through sustainable mortgage modifications. Hundreds of billions more were still available and could have been used by the White House and the Treasury Department to help support a massive reduction in mortgage debt. But Geithner avoided this path to a housing recovery, explaining that he believed it would be “dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness.” Treasury amplified that argument in 2010, after it reluctantly instituted a weak principal reduction program in response to overwhelming congressional pressure. That program incongruously left it to the largely bank-owned mortgage servicers (and to Fannie and Freddie) to determine if such relief would be implemented. In response to our criticism that the conflicts of interest baked into the program would render it ineffective unless principal reduction was made mandatory (when in the best interests of the holder of the loan), Treasury reinforced Geithner’s early statements, refusing to do so primarily because of fears of a lurking danger: the ”moral hazard of strategic default.” The message was clear: No way, no how would Treasury require principal reduction, even when Treasury’s analysis indicated it would be in the best interest of the owner, investor or guarantor of the mortgage.

Indeed, at every critical juncture at which Treasury could have unilaterally implemented meaningful principal reduction, the same argument now presented by DeMarco was hauled out as an excuse for inaction.

I want to believe the best intentions of the administration, and if they've had a real change of heart over the importance of principled reductions, but it really would fly in the face of everything we've seen on housing policy in the Obama Administration.

The fact that every left leaning advocacy group simultaneously sent me some campaign action against Ed DeMarco is what sent my bullshit detectors into high gear. Focusing on DeMarco does nothing other than divert our attention from the people who have presided over our abysmal housing policy the past three years.   Wish it was something else, but that's really the only way I can see it at this point.

Fire Tim Geithner

Atrios points me to the fact that it's been two years since this atrocity. How on earth does he still have a job?

"TARP Was Worse than you think"

Great interview with Neil Barofsky. Now that I own the book, expect more quotes and revelations in the coming weeks.

They Cut Me... LIKE A KNIFE!!!

So my feelings on Tim Geithner are already known... and I will be reading a copy of Neil Brofsky's book as soon as I get my hands on it. And that also means I have plenty of blogging material as peices of the book get revealed. This was far too good to pass up:

Geithner got dramatic. "Neil, you think I don't hear those criticisms? I hear them. And each one, they cut me," he said, pausing and then making an emphatic cutting motion with one hand as he said "like a knife."

LIKE A KNIFE!!!

Helping the Banks instead of Helping People

David Dayen describes a bombshell from Neil Barofsky's awesome-sounding book:

The important moment in the book for me comes conveniently after Barofsky recounts this FDL News item, one of my HAMP horror stories. Barofsky shows how HAMP’s faulty design led to all sorts of problems like this, with trapped borrowers, extended trial payments, no-doc modifications, and eventually unnecessary foreclosures. Barofsky mused that Treasury didn’t care about the suffering of borrowers under HAMP, and the issue came up in a meeting with the Treasury Secretary, which was also attended by Elizabeth Warren, then the head of the Congressional Oversight Panel, another TARP watchdog.

Warren asked Geithner repeatedly about HAMP. After several evasions, Geithner said about the banks, “We estimate that they can handle ten million foreclosures, over time… this program will help foam the runway for them.”

This is a revelatory moment for Barofsky in the book, and should be for everyone reading. Geithner’s concern, first of all, was with how the banks would respond to the program, not how homeowners would respond to it. In fact, homeowners are quite besides the point. Regardless of their situation, they will be one of the 10 million foreclosures, in Geithner’s construction. His goal was merely to space out the foreclosures and give the banks time to earn their way back to health, mostly through the other parts of the bailout, that enabled them to earn profits.

This is a classic “extend and pretend” scheme; banks can extend the time frame for their losses, and pretend they were financially strong in the meantime. We previously had evidence that Geithner and the Treasury Department thought this way. In August 2010, a Treasury official (which Barofsky outs in the book as Geithner) made basically the same defense of HAMP, that it would give time for the banks to absorb foreclosures rather than have them come on the market all at once. But that came as a defense of the program after the fact. This scene with Warren and Barofsky came in mid-2009, when the program was in its infancy. And it’s prospective, not retrospective. It’s not that Treasury came up with a justification after the performance of HAMP faltered. It’s that it was designed this way.

This account makes clear what we've known for some time. Rather than a program to help the foreclosure crisis, it was designed to help the banks, and help the banks alone.

This administration hasn't given a shit about the foreclosure crisis, and has done nothing to help homeowners in need. In fact, they designed a program filled with ways to screw homeowners, solely because it would help the greater goal (in their minds) which was recapitalizing the banks. A lot of suffering has occurred from foreclosures because the administration chose to think about the banks first, and everyone else never. That's on Tim Geithner and Obama. No excuses.

Geithner's NY Fed Knew LIBOR was Rigged

This might get interesting:

The New York Federal Reserve on Friday released documents showing it knew banks were manipulating a key interest rate more than four years ago.

The documents, which date back to 2007, show that the Fed became fully aware that banks were lying about their borrowing costs when setting Libor, and chose to take no action against them.

The documents will likely feed growing concerns about whether the New York Fed, its former chief Timothy Geithner and other market watchdogs did everything they could to stop the manipulation. The documents also raise more questions about whether the New York Fed and other regulators were too cozy with the banks involved, looking the other way in order to spare the banks too much pain at a time when the financial crisis was still brewing.

"We know that we’re not posting um, an honest LIBOR," a Barclays employee tells a New York Fed analyst in an April 11, 2008, call, "and yet we are doing it, because, um, if we didn’t do it, It draws, um, unwanted attention on ourselves."

The New York Fed representative expresses sympathy and understanding:

"You have to accept it," she says. "I understand. Despite it’s against what you would like to do. I understand completely."

The widespread manipulation of Libor, an interest rate set by banks self-reporting what they pay to borrow money for short periods, may have cost borrowers (when rates were manipulated higher) and state and local governments (when rates were manipulated lower) untold millions of dollars. And it could end up costing several banks billions of dollars in penalties and lawsuits.

Shocking Revelations From Within The White House (With Cats and animated gifs!)

The debate over the size of the stimulus has always been one that captivated progressives, and this will probably not end any time soon. People like myself have looked at all kinds of reporting on the subject for clues as to who chose the size, why it was chosen, and why there was such an emphasis on tax cuts.

Apparently a new book will be giving us a more complete picture of that process, and a whole lot more:

There has been no shortage of literature to dissect how President Obama handled the stimulus debate. But a new book by Noam Scheiber of The New Republic, "The Escape Artists," sheds new light on the matter.
As Scheiber writes, members of the president's economic team felt that if they were to properly fill the hole caused by the recession, they would need a bill that priced at $1.8 trillion -- $600 billion more than was previously believed to be the high-water mark for the White House.

The $1.8 trillion figure was included in a December 2008 memo authored by Christina Romer (the incoming head of the Council of Economic Advisers) and obtained by Scheiber in the course of researching his book.
"When Romer showed [Larry] Summers her $1.8 trillion figure late in the week before the memo was due, he dismissed it as impractical. So Romer spent the next few days coming up with a reasonable compromise: roughly $1.2 trillion," Scheiber writes. 

As has now become the stuff of Obama administration lore, when the final document was ultimately laid out for the president, even the $1.2 trillion figure wasn't included. Summers thought it was still politically impractical. Moreover, if Obama had proposed $1.2 trillion but only obtained $800 billion, it would have been categorized as a failure. 

"He had a view that you don't ever want to be seen as losing," a Summers colleague told Scheiber. 

So that's news. Before now, no one had previously mentioned a 1.8 trillion dollar stimulus under any context. But wait there's more:

When Summers made the final presentation to the president's then-chief of staff Rahm Emanuel, Scheiber writes, "It reflected what he deemed the best course that was politically feasible ... Yet because Emanuel and the president assumed Summers was largely giving them [economic advice], they believed they were closer to the ideal than they actually were." 

Well that's not good. Summers thought his job was to give the president a proposal that he thought was politically feasible, while Obama and Emanuel believed they were getting a strictly economic overview of what needed to be done. That may salvage some of Summers' rep as an economist (He still thought the stimulus only needed to be a "insurance plan", so not really), but it is fairly damning on the whole administration that this fuck up occurred on the most important decision of Obama's presidency.

But at least no one in the room was peddling completely discredited arguments against a larger stimulus, right?

The split was noticeable as early as the crafting of the Recovery Act, often with Office of Management and Budget Director Peter Orszag playing the role of Keynsian antagonist. Orszag, writes Scheiber, "worried that the sheer size of the stimulus could undermine the confidence of businessmen and money managers." In the subsequent year, when other advisers argued that an additional dose of stimulus would prop up a staggering economy, he downplayed the potential impact. 

Sweet Jesus. Having someone making such a bullshit argument against stimulus is the equivalent to having to having a climate denier in the room when talking about global warming. It's not true and stupid, and why the fuck was someone who believes crazy things like that advising the president. Moving on:

At various intervals, Orszag clashed with different members of the president's economic and political team. David Axelrod, the president's chief communications hand, became convinced that Orszag was leaking material to The New York Times. Orszag, in turn, refused to incorporate any of Axelrod's talking points that he didn't personally find credible. Summers fought Orszag's pursuit of a deficit reduction commission, arguing that it would lock the president into uncomfortable reforms. He also pushed back on Orszag's idea of a domestic spending freeze, insisting the cuts would be too close to the bone.

"We're Democrats," Summers harrumphed. "We believe in these things." Besides, both ideas struck him as gimmicks unworthy of a president. To colleagues he complained that "what's really important in life is not to believe your own bullshit."

Orszag, in turn, so distrusted Summers' influence that, as Scheiber writes, he "enacted a special rule for Summers's deputy, Jason Furman: anyone receiving an unsolicited inquiry from Furman was to alert Orszag's chief of staff, Jill Blickstein."

In the end, however, only one economic adviser truly argued that deficit reduction should be put off for another day. And by the time the 2010 elections were over, even Obama's top political advisers were arguing that Christina Romer's position was utterly untenable.

It's nice to have Larry Summers being a dick for our cause every now and then! The "believing your own bullshit" line is key. I remember after Obama gave his main 'Austerity Now' speech, my first thought was, holy crap, I think they might actually believe this stuff. Not everyone believes it, but it's scary to know that some of them do.

Even with all the stuff listed above, we haven't gotten to the most stunning revelation in this article:

[Top Adviser David] Plouffe urged the president to give [entitlement reform] a shot. "I said he [Obama] should be big on entitlements," Plouffe told one former administration official, by which he meant reining in these budgetary elephants. Sure, this would enrage the party's base. But the political upside with the rest of the country would more than make up for it ... "Plouffe is pretty big on accomplishments trump normal politics," said one White House colleague. "Plouffe's view is that big trumps the little."

This is quite possibly the dumbest thing I have ever fucking heard. Putting aside the merits of cutting social security and medicare (none)... HE THINKS THAT CUTTING THE TWO MOST POPULAR GOVERNMENT PROGRAMS WOULD BE A POLITICAL WINNER. The guru brought back into the administration to put his reelection back on track THINKS CUTTING SOCIAL SECURITY AND MEDICARE IS A POLITICAL WINNER.

There are seriously no words for that level of stupidity. With advisers like that, what could possibly go wrong?

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.

"You're Pretty Terrific"

These things kind of speak for themselves:

A set of recently released transcripts of internal Federal Reserve communications includes a burst of profuse praise from then-New York Fed President Timothy Geithner directed toward then-Fed Chairman Alan Greenspan.

"Mr. Chairman, in the interest of crispness, I've removed a substantial tribute from my remarks," Geithner said during a Jan. 31, 2006, meeting of the central bank's Federal Open Market Committee. Attendees responded with laughter, according to the transcript.

"I am most appreciative," Greenspan replied.

"I'd like the record to show that I think you're pretty terrific," Geithner said, prompting more laughter. "And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

Geithner's probability estimate was a bit off. Today, Greenspan is the subject of criticism from all corners -- notably including U.S. Circuit Judge Richard Posner, a Ronald Reagan appointee -- for his refusal to combat or even recognize the predatory lending-fueled housing bubble.

For several years leading up to 2006, Federal Reserve Governor Edward Gramlich had warned Greenspan and other central bank officials about dangers brewing in the subprime mortgage market. Gramlich left the Fed in 2005, but Greenspan declined not only to attempt to pop the ballooning housing bubble, but even to try to regulate abusive lending. Posner and others have denounced Greenspan's decision to keep interest rates low for a very long time as a monetary policy failure, which, combined with his refusal to enforce consumer protection regulations, allowed that bubble to ossify into an economic wrecking ball.

At the time Geithner praised Greenspan, the Fed chairman was widely respected among conservatives and neo-liberals, but concerns were already circulating about the potential implications of the subprime mortgage problems. Within months, Ben Bernanke would replace Greenspan as Fed chair and make a host of reassuring comments in the media about the subprime debacle being "contained."

Greenspan, an acolyte of novelist-philosopher Ayn Rand, eventually acknowledged before Congress that his "ideology" was not equipped to handle the rapacious behavior of major banks during the housing bubble.

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan told then-House Oversight Committee Chairman Henry Waxman (D-Calif.) in 2008. "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."

Own Your Incompetence

Long time readers of the blog will know this stuff really pisses me off:

White House Press Secretary Jay Carney made a surprising assertion on MSNBC Wednesday, saying that in early 2009, as Barack Obama was taking office, there weren't any major economists who understood just how bad the recession was.

The problem is that the evidence doesn't support his claim.
"There was not a single mainstream, Wall Street, academic economist who knew at the time, in January of 2009, just how deep the economic hole was that we were in," Carney told Morning Joe hosts Mika Brzezinski and Joe Scarborough on Wednesday's program.

Yeah, uh... bullshit!

In reality, though, well-respected analysts and economists from all corners were sounding alarms about the state of the economy -- in early 2009, and even before.

Numerous experts warned that the stimulus bill wouldn't go far enough to address the nation's economic woes as it was making its way through Congress in the early days of Obama's presidency. They cautioned that the economy was pointed toward higher unemployment and weak or nonexistent growth -- conditions that have indeed come to characterize Obama's first term in office.

For example, Douglas Elmendorf, director of the non-partisan Congressional Budget Office, testified before the House Budget Committee on on January 27, 2009, that without immediate action, the economy would sag below its potential by nearly 7 percent for the next two years, and that unemployment would exceed 9 percent by early 2010 -- something that actually happened four months later, in May 2009.

Describing this projected gap between potential and actual economic output, Elmendorf called it the largest shortfall "in terms of both length and depth ... since the Depression of the 1930s."

That same month, Paul Krugman, a left-leaning economist and Nobel laureate, wrote in a New York Times column that Obama's plan to jump-start the economy was "nowhere near big enough," arguing that it was "unlikely to close more than half of the looming output gap" at a time when the country was experiencing "the most dangerous economic crisis since the Great Depression."

But Krugman wasn't the only economist to draw a Great Depression comparison. Martin Feldstein, Harvard professor and former economic adviser to Ronald Reagan, wrote in January 2009 that "this recession is likely to last longer and be more damaging than any since the depression of the 1930's."

And James Galbraith, a left-leaning economist and former executive director of the Joint Economic Committee said, "there are many good reasons to think" that America is in "a true financial crisis of the type in the 1930s." Mark Zandi, chief economist at Moody's Analytics warned at the time that "the economy appears headed toward its worst downturn since the Great Depression."

Dean Baker, a left-leaning economist and co-director of the Center for Economic and Policy Research, issued a warning similar to Krugman's in January 2009, writing in the Guardian that "[t]his downturn is so severe that [the stimulus bill] may not be sufficient to offset even half of its impact."
And a January 2009 survey of more than 100 economists, conducted by the National Association for Business Economics, found that that business conditions overall were the worst in the survey's 27-year history. At the time,78 percent of the economists said they expected GDP to keep falling.

Strongly-worded warnings about the economy were pouring in even before January 2009, in fact. Nine months earlier, in April 2008, left-leaning economist Joseph Stiglitz, a Columbia professor and Nobel laureate, told CNBC that the recession was "going to be one of the worst economic downturns since the Great Depression." And as early as 2006, the economist and New York University professor Nouriel Roubini -- famous for his perennially bearish outlook, but also regarded by many as a prescient forecaster -- was predicting a recession, triggered by a softening housing market, that would be "much nastier, deeper and more protracted than the 2001 recession."

"There were a lot of us who were saying that the stimulus was nowhere near large enough at the time," Baker told The Huffington Post when reached for comment on Wednesday. "The fact that it was going to be considerably more severe than the Obama administration was predicting at the time -- there were a number of us who were quite explicit about that."

There were plenty of people who saw this coming, just not the fuck ups you hired. You hired people from the same school of thought (and in some cases, the exact same people!) that pushed through the deregulation of the financial sector that destroyed our economy in 2008. Ten years later, they were still making horrible decisions. Who could have imagined that?

Plently of people saw this coming, and knew you weren't doing enough. You just chose to hire people who were more concerned with the perils of the government "doing too much", rather than doing everything humanly possible to turn the economy around.

That was solely your fuck up, and the fault of your administration. Own it.

It's Possible to Do the Right Thing

Despite popular belief, it is possible to be a politician and not whore yourself to banking industry:

Massachusetts Attorney General Martha Coakley said today that she has filed suit against five major US banks for allegations related to mortgage fraud and unlawful property seizures. Coakley said she will hold a press conference at 1 p.m. today to detail the suit against Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co, Citi, and Ally Financial.

I know that the president of the United States faces more political pressure than attorney generals from Massachusetts, New York or Delaware, but there is nothing stopping him from directing Eric Holder to look into these practices nationally. More importantly, he most certainly does not need use his political power to force a settlement that lets the banks of the hook.

I'm not saying any of this stuff is easy or without cost, I just think any excuses made for Obama on this front are particularly week. He has the power to investigate the banks, he has used his power to shield them from scrutiny instead.

Systematic Fraud Is A Pretty Big Loophole

There are several basic ways to look at the financial/housing crisis. The way you see the crisis is usually imporant, because it puts you on the right track in determining what needs to be done to prevent the next crisis.

Some views: (extremely oversimplified to make a point)

(1) Poor people scammed the banks into giving them bad loans.

(2)You can think that Banking industry took advantage of the deregulation and bank friendly laws to make risky investments.

(3) Knowing that there was no meaningful oversight, the banks committed incalculable amounts of fraud in all of it's forms.

Number 1 is just stupid and completely factually wrong, but it allows conservatives to blame the poor for something, which is no doubt why many of them believe this myth.

Number 2 is right and very important, but is also far from the whole story.

Number 3 is also right, and is something I still don't think most people fully understand about the crisis.

Back to my point earlier, your view of what occured is very imporant in setting the course for how to clean up the mess. Based on Obama's response to the crisis this isn't particularly surpising, but it's very upsetting to hear him say this: (via dday)

“Banks are in the business of making money, and they find loopholes,” the President said.

Many of the practices on Wall Street “weren’t necessarily against the law but they had a huge destructive impact,” said the President.

So he's right that businesses find loopholes and exploit them, but he's spectacularly wrong that no one broke the law. It's a convenient thing to say when your Attorney General is doing nothing to prosecute those people, but that doesn't make it true. Yves Smith:

Is breaking IRS rules a “loophole”? How about making repeated false certifications in SEC filings? Or as Dayen points out, fabricating documents? Or making wrongful foreclosures, aka stealing houses?

The Administration’s strategy for maintaining this posture is by being anti-investigation and anti-transparency. As we’ve discussed, the stress tests were a sham. The foreclosure task force didn’t even try to look serious, it was a mere 8 week investigation and of 2800 cases chosen for review (in no scientific manner), only 100 were foreclosures. The US Trustee’s office found a level of servicing errors more than 10 times that asserted by banks and happily parroted by Federal banking regulators. We expect readers could add to this list just as readily as we can.

There are plenty of grounds for legal action. Contrary to the Obama/Geithner position, this is a target rich environment. And some of the violations were persistent and deliberate enough that they might well raise to the level of being criminal. This is a mere illustrative tally:

1. Violation of REMIC (real estate mortgage conduit) rules, which are IRS provisions which allow mortgage backed securities to be treated as pass-through entities. As we’ve indicated, the violations were clear cut and are easily documented. Moreover, when the senior enforcement officer in the IRS was alerted last year, she was keenly interested. But the word that came back was the the question had gone to the White House, and the answer was to nix going after these violations: “We are not going to use tax as a tool of policy.” So this is not a case of creative use of “loopholes,” this is prima facie evidence of an Administration policy of protecting the banks.

2. Consumer fraud under HAMP. Catherine Masto of Nevada has already delineated this case in her second amended complaint against numerous Bank of America entities (in fact, the evidently clueless President could find a raft of other litigation ideas in her filing). All the servicers engaged in similar egregious conduct.

3. Securities fraud by mortgage trustees and serivcers. While the statute of limitations for securities fraud for the sale of toxic mortgage securities in the runup to the crisis has now passed, securitization trustees and servicers are making false certifications in periodic SEC filings. In layperson terms, the trustee certifies that everything is kosher with the trust assets. As readers well know, in many cases the custodians do not have the notes or they were not conveyed to the trust as stipulated in the pooling and servicing agreement (as in they were not properly endorsed through the chain of title).
Now of course, pursuing this sort of litigation would blow up the mortgage industrial complex. But it represents a powerful weapon to bring unrepentant bankers to heel.

4. Widespread risk management failures as Sarbanes-Oxley violations. As we’ve discussed, Sarbox provides a fairly low risk path to criminal prosecutions. And we believe the SEC has been incorrectly deterred by an adverse ruling in the early stages of its case against Angelo Mozilo. In that case, the judge (with no explanation of his ruling) barred the SEC from claiming SEC violations (which this case did) and double dipping by adding a Sarbox charge (securities fraud statutes parallel Sarbox language; indeed, that was one of the complaints re Sarbox, that many of its provisions were already represented in existing law). That’s far more significant than it appears. As we argued in an earlier post, the language in Section 302 (civil violations) tracks the language in Section 906 (criminal violations). A win on a Section 302 case would thus set up what would appear to be a slam dunk criminal case.

There were crimes committed. If you're just trying to rebuild a broken system, you can't whitewash a major part of the problem. Unfortunately the White House seems hell bent on doing just that.

Why Don't They Like Us???

I really feel like this exchange with Tim Geithner is incredible. First, he is asked about #occupywallstreet:

"I feel a lot of sympathy for what you might describe as the general sense among Americans as whether we've lost the sense of possibility and whether after a pretty bad lost decade in terms of income growth or fiscal responsibility...followed by a devastating crisis, huge loss of faith in public institutions, people do wonder whether we have the ability to do things that can help the average sense of opportunity in the country," Geithner said at The Atlantic's Ideas Forum, just a few blocks from both the U.S. Capitol and the White House.

You get a sense that he cares, and understands why people are so upset. What part of the current equasion does Tim Geithner not understand?

To the contrary, Geithner expressed dismay at the fact that many Wall Street executives have grown to loathe President Obama over the last two years.

"I think it's inexplicable," Geithner said. "They -- people resent when they need help. It's a natural thing."

They resent the huge amount of public anger they've been subjected to because they caused the crisis -- they sometimes claim, they think it was created by us, which I think is a deeply unfair judgment. And they react to what is pretty modest, common-sense observations about the system as if they're deep affronts to the dignity of their profession. And I don't understand why they're so sensitive. But they're very wounded, and they've seen a huge amount of damage to peoples' confidence in their capacity to not just manage risk and to meet the needs of their customers, but in the broader public consciousness. And they'd like us to heal that for them, and they ask me all the time, Why can't you heal that for us? And I say to them, i think reasonably, that's something you've got to earn back yourself. We can't do that for you.

That rant is fairly incredible. I don't have much of a comment, but I do think it gives you a pretty good view of how Geithner sees the world.

First Rule of Job Creation: Creating Jobs

It's really not as complicated as people would have you believe. Dean Baker: (via atrios)

It is essential to remember that this is a crisis of a lack of demand, not supply. For this reason, it is ungodly stupid that so many people are being made to suffer from unemployment and declining living standards.

We know how to get out of this mess, we have known how for 70 years. We just need the government to generate demand. That means spending money. Ideally it would spend money on useful things like education, health care, and infrastructure, but even if it spent money in wasteful ways it would still create jobs and put people to work.

In the 30s we got much of the way back to full employment with the Works Progress Administration and other programs. Much of what was done was useful -- look around, you won't have to go far to find infrastructure built by depression-era programs. However, it took the massive spending associated with World War II to get the economy back to full employment. There is no magic associated with war that makes military spending more effective in creating jobs. The only difference was that the threat to the nation from the Axis powers removed the political obstacles to the necessary spending.

The same situation applies today. We just need to spend money. That applies to both the United States and the euro zone countries. The problem is that we have more people in political leadership positions who want to be morality cops and lecture about balancing budgets rather than focus on policies that will restore economic growth. This includes the top officials at the European Central Bank, many of the voting members of the Federal Reserve Board's Open Market Committee and much of the political leadership in the euro zone countries, the United Kingdom and of course here.

It's really that simple. We know what works, and we know what could restart the economy and alleviate suffering for millions of people. Our elites have simply decided these solutions aren't going to be considered. Republicans and quite a few Democrats won't support government spending that isn't related to killing brown people and Jared Bernstein has stated repeatedly that there is "no appitiete" for direct government job creation in the White House.

So for all the talk of jobs, there is no discussion of the best way to actually create jobs. Frustrating.

But They Passed The Stress Tests!!!

Move along, nothing to see here:

Sometimes, personal-finance gurus advise cash-strapped consumers to pay off their high interest-rate credit cards by using a lower-rate one.

Banks have been trying the same tactic to get out from what they owe to Uncle Sam - by borrowing from Uncle Sam. And guess what? Uncle Sam is encouraging it.

TARP, the US Treasury’s $700 billion bailout of banks and the housing market, technically expired all the way back in October 2010. The exhausting debate about whether TARP was successful persisted more than two years after the program started. Neil Barofsky, the official in charge of keeping TARP accountable, stepped down in February and slammed the program in a New York Times op-ed in March.

So it’s no surprise the government wants to clear its rolls of the hundreds of banks that have been dawdling in paying back their TARP bailouts from January 2009. Keefe Bruyette & Woods says that Treasury has $19.1 billion still invested in about 473 banks through TARP.

How to do that? Funnel them to yet another Treasury bank-stimulus program. So earlier this year, a Treasury official dropped a big hint: some banks might want to pay back TARP - hint, hint - by applying for loans from the newly established $30 billion Small Business Lending Fund.

If "finding jobs for unemployed people" could somehow be called "bailing out insolvent banks", imagine how many creative solutions the administration would find!

Austerity Forever

Hey, maybe talking about a fake problem for the last two years wasn't the best idea?:

WASHINGTON (Reuters) - Employment growth ground to a halt in August as sagging consumer confidence discouraged already skittish U.S. businesses from hiring, keeping pressure on the Federal Reserve to provide more monetary stimulus to aid the economy.

Nonfarm payrolls were unchanged, the Labor Department said on Friday, the weakest reading since September. Nonfarm employment for June and July was revised to show 58,000 fewer jobs. Despite the lack of employment growth, the jobless rate held steady at 9.1 percent. The unemployment rate is derived from a separate survey of households, which showed an increase in employment and a tick up in the labor force participation rate.

. . .

If job growth does not accelerate, it could take more than four years to return to the pre-recession employment level. Private payrolls increased only 17,000 after rising 156,000 in July. Government employment fell 17,000, contracting for a 10th straight month. The decline in government payrolls was tempered by the return of 23,000 state workers in Minnesota after a partial government shutdown in July.

Details of the employment report were weak, with manufacturing payrolls falling 3,000, reflecting the slump in business confidence. Factories added 36,000 new workers in July as disruptions to motor vehicle production caused by a shortage of parts from Japan eased.

The average work week dropped to 34.2 hours, the fewest since January, from 34.3 hours. Average hourly earnings fell three cents.

I'm excited for next week's "jobs" speech to find out how more free trade deals and more spending cuts will get us out of this mess.

Say Hello To The New Guy

This new guy seems like he will be a force for good:

As President Obama just announced, Princeton Professor Alan Krueger is his pick to be the next Chairman of the Council of Economic Advisers. Will Krueger’s background in labor bring a fresh perspective to the table? Or will he too be stymied by business as usual? Roosevelt Institute Fellows weigh in.

“At a time when the economic and political hurricane in Washington appeared to cause all people with any economic training or talent to evacuate the administration, it is welcome news to see that Princeton economist Alan Krueger has joined as the head of the Council of Economic Advisers. He is a fine economist with government experience at the Treasury and the Labor Department and he should be very familiar with the people and practices of government. There are no issues more important to address than the persistent and devastating high levels of unemployment, and Krueger’s academic strengths are ideally suited to meet the challenge. Dr. Krueger has also done a great deal of work on the economics of popular music. One hopes that he can change the tune of austerity that is currently a hit in Washington D.C. and refocus our nation on the need to eliminate the tolerance of so many idle resources.” -Senior Fellow Rob Johnson

“I think the choice of Krueger is great, but a little too late. He’s well respected across the ideological spectrum within the mainstream economic discipline, and he’s generally a liberal economist, concerned about issues of economic and racial inequality, and not zealously anti-labor. (In fact, he’s probably slightly pro-labor.) He’s not a Krugman or Stiglitz or Sachs politically, but he’s not far behind them. His work has been important in debunking right-wing ideology about the effect of the minimum wage. In fact, one of the most important studies of his career may be a highly influential paper and book he wrote with David Card using a ‘natural experiment’ of a minimum wage increase in New Jersey and not Pennsylvania to empirically assess whether or not an increase in the minimum wage had an adverse affect on unemployment, finding it did not. The method and evidence used were of the highest and most cutting-edge within the discipline, forever changing the debate. -Fellow Dorian Warren

“It’s good to have a highly competent labor economist running the place. He has long been concerned with unemployment, wage stagnation, and inequality. Whether he can break through the political wall at the White House is another question.” -Senior Fellow Jeff Madrick

There have been other non fuck up economists in the administration, but they were never in actual positions of power and were shut down by those above them (Summers and Geithner). Since it seems increasingly clear that Geithner is running the show I'm skeptical he can make much of an impact, but at least Obama hired someone who seems to understand that propping up insolvent banks isn't the solution to our economic problems.

Eric Schneiderman Remains a Beast

It's increasingly difficult to find politicians that don't suck, but Eric Schneiderman continues to prove that it's actually possible to take on the biggest financial interests in the United States. Unsurprisingly, this does not make you popular among the rich and powerful. His actions have put him under fire not only from the banks themselves, but from people who are carrying their water, in this case, the Obama Administration.

Eric T. Schneiderman, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal.

In recent weeks, Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks.

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

But Mr. Donovan and others in the administration have been contacting not only Mr. Schneiderman but his allies, including consumer groups and advocates for borrowers, seeking help to secure the attorney general’s participation in the deal, these people said. One recipient described the calls from Mr. Donovan, but asked not to be identified for fear of retaliation.

Not surprising, the large banks, which are eager to reach a settlement, have grown increasingly frustrated with Mr. Schneiderman. Bank officials recently discussed asking Mr. Donovan for help in changing the attorney general’s mind, according to a person briefed on those talks.

He's currently refusing to sign on to a deal that would give the big banks immunity from prosecuting their fraud. He doesn't want a deal because unlike Geithner or any of the people pushing for a quick settlement, Schneiderman ACTUALLY WANTS TO PROSECUTE THEIR FRAUD. This difference isn't made particularly clear in the story and is extremely important. One side wants to prosecute the massive fraud that occured at the big banks, one side doesn't. It's essential to remember that when those defending the banks spout of BS like this:

“Eric and I agree on a tremendous amount here,” Mr. Donovan said. “The disagreement is around whether we should wait to settle and resolve the issues around the servicing practices for him — and potentially other A.G.’s and other federal agencies — to complete investigations on the securitization side. He might argue that he has more leverage that way, but our view is we have the immediate opportunity to help a huge number of borrowers to stay in their homes, to help their neighborhoods and the housing market.”

And Alisa Finelli, a spokeswoman for the Justice Department. said: “The Justice Department, along with our federal agency partners and state attorneys general, are committed to achieving a resolution that will hold servicers accountable for the harm they have done consumers and bring billions of dollars of relief to struggling homeowners — and bring relief swiftly because homeowners continue to suffer more each day that these issues are not resolved.”

The idea any of these people care about keeping people in their homes would be laughable if we weren't talking about people being kicked out of their homes. Marcy Wheeler:

You see, the Administration has an “immediate opportunity to help a huge number of borrowers stay in their homes,” without any action from Eric Schneiderman. They have a way to do so more swiftly, in such a way the servicers actually would be held accountable. It would involve offering refis with principal reductions to all the underwater homeowners whose loans are owned by Fannie and Freddie. That would not only help a huge number of borrowers stay in their home, but it would be massive stimulus.

That, along with HAMP, a program that was designed to prop up the banks rather than helping homeowners, doesn't give the Administration a leg to stand on when it comes to their credibility about "helping people stay in their homes". Their actions speak for themselves, and show that they see the foreclosure crisis as a problem in terms of the solvency of the megabanks, but don't really give a shit about the human/economic toll of mass foreclosures. Instead, they're spending their time going after one of the few people who isn't following the marching orders of the banking industry.

I've said it before, I'll say it again, Eric Schneiderman for president.