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Home Publications Blogs Beat the Press People Opposed Summers Because He Helped Give Us an Over-Valued Dollar and Massive Trade Deficit

People Opposed Summers Because He Helped Give Us an Over-Valued Dollar and Massive Trade Deficit

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Wednesday, 13 November 2013 06:01

In an interesting column discussing the splits on economic issues in the Democratic Party and how they affect Hillary Clinton's prospects for 2016, Harold Meyerson noted progressives opposition to Larry Summers as Fed chair. He told readers:

"To the liberals, Summers’s sin was his central role in deregulating derivatives when he served as Bill Clinton’s Treasury secretary as well as his support for repealing the Glass-Steagall Act, a change that allowed previously safe depositor banks to use those funds for speculative investments."

Actually the negative impact of the soaring dollar, which was a direct result of the bailout from the East Asian financial crisis that Summers helped engineer, dwarfed the impact of deregulating derivatives and repealing Glass-Steagall. The harsh terms of the bailout led countries throughout the developing world to begin a massive accumulation of dollar reserves to avoid ever being in the same situation.

The resulting trade deficit created an enormous hole in demand in the economy. This hole was filled by demand generated by the stock bubble in the 1990s. When that bubble burst it gave the U.S. economy the longest period without job growth since the Great Depression. The economy only started creating jobs again when the housing bubble picked up steam and filled the demand gap created by the trade deficit.

While the decline in the dollar since 2002 has partially closed the trade deficit, it is still creating a demand gap of more than $500 billion a year. Absent another bubble, this gap can only be filled by large budget deficits. Since almost no one in a position of responsibility in Washington is prepared to advocate larger deficits, this means that Summers high dollar policy is likely to condemn the country to high rates of unemployment long into the future.

Comments (14)Add Comment
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written by Last Mover, November 13, 2013 7:21
The resulting trade deficit created an enormous hole in demand in the economy. This hole was filled by demand generated by the stock bubble in the 1990s.


In other words this is the end state of the international economic model developed under Rubin and Summers that now transfers 95% of gains on the upside of the current "recovery" - driven by trade deficits and asset bubbles - to the 1% and leaves them unscathed on the downside.

That Dean Baker emphasizes the impact of the trade deficit over the bubble in terms of relative economic damage just calls out loser liberals for what they are, not recognizing the greater bad ... the trade deficit masked by the bubble until it burst.
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written by Bob Spencer, November 13, 2013 7:23
Interesting stuff. Now, I wonder what the oil prices would be if the dollar weren't so high. How much would domestic industrial or other production grind down with higher oil prices?
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written by Alex Bollinger, November 13, 2013 7:34
I don't disagree on the substance, but I think Meyerson's assessment of what liberals were saying is more accurate. The criticisms of Summers that I was reading from liberal blogs centered around deregulation, with the occasional mention of monetary policy.

It was only here that I was reading about dollar appreciation in the 90's.
The problem
written by This is me being generous, November 13, 2013 9:22
... Harvard economic and government gurus. They can't admit they're wrong, since that would invalidate their careers and lifework. Humiliation is worse than death. And economic predators pay so well for the lying, too.
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written by joe, November 13, 2013 9:35
The investment capital flowing into the country because of that trade deficit was a primary cause of the financial crisis. Clintonomics was a disaster.
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written by Aidan, November 13, 2013 9:51
Who were the other "people" opposing Summers because of the over-valued dollar and massive trade deficit? Anyone other than you?
Mr.
written by Elwailly, November 13, 2013 10:01
"While the decline in the dollar since 2002 has partially closed the trade deficit, it is still creating a demand gap of more than $500 billion a year. Absent another bubble, this gap can only be filled by large budget deficits."

I don't understand why a bubble I necessary to increase demand. Are you saying the only way for the Fed to increase NGDP is to create a bubble?

Or are you saying the Fed has no reaction function to the level of budget deficits?
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written by Pat MacAuley, November 13, 2013 10:22
The hole in aggregate demand is greater than the trade deficit itself because of the multiplier effect. Forty-five years ago, when the trade deficit was more balanced, a surge in consumer demand would bring a large surge in factory hiring and overtime, with a large secondary and tertiary boost in demand. Nowadays much of the secondary boost in aggregate demand occurs in China rather than the US.
The Innocent Fraud of the Trade Deficit
written by Tyler , November 13, 2013 10:59
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written by watermelonpunch, November 13, 2013 2:59

Thank you for prioritizing Larry Summers' "sins".


I'll still go with "all of the above", if that's okay with everyone.

At this point in despair of the economy... I'll embrace people who oppose the likes of Summers, even for the wrong reasons, let alone the not as important reasons.

Filed under: Sad Commentary on Our Times
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written by Crocodile Chuck, November 13, 2013 9:02
"The harsh terms of the bailout led countries throughout the developing world to begin a massive accumulation of dollar reserves to avoid ever being in the same situation"

Not to defend Lawrence Summers, but wasn't the 'harsh terms of the bailout' dictated more by the IMF?

http://img1.eramuslim.com/fckfiles/image/ekonomi-syariah/imf-soeharto.jpg
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written by PeonInChief, November 14, 2013 10:05
Summers has so many sins. How can I be expected to pick just one?
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written by kharris, November 14, 2013 12:17
I don't know if this was an intentional rhetorical bait and switch, or just sloppy writing. "People" opposed Summers for whatever reason they opposed him. The magnitude of the impact of his various bad policy decisions is a possible reason to oppose his Fed appointment, but there is not much reason to claim that Meyerson's assessment is wrong and Baker's is right. This is, in fact, one of those empirical issues. If you want to know why "people" did this or that, you ask them. You don't just claim your views as their views.

Well, if you call them "Murcans" then naturally you'd claim they see things just the way you do. Otherwise, you ask them.
Most of Summers critics focused on his advocacy for deregulation and fight against stimulus
written by A Populist, November 16, 2013 6:52
Most of the columnists, bloggers, and commenters critical of Summers, were indeed focused on his role in fighting derivatives regulation, as well as his opposition to stimulus spending - recommending a smaller stimulus to Obama.

The strong dollar policy did indeed create a lack of demand, which allowed the Wall Street Bankers to profit hugely from the securitization and housing bubble. You are right to point this out, but most critics of Summers didn't focus on his anti-demand policies, but rather on his role in deregulation and derivatives.

Without this hole in demand, the housing bubble would have popped much sooner. The resulting rises in wages and prices would have provoked outrage from those in power - who benefit from keeping unemployment high, and wages low. And if, at the start of the housing bubble, there had been sufficient demand to maintain full employment, interest rates before the bubble could been maintained *well* above zero - so then there would have been room to cut rates post-crash, to rebalance the economy.

However, the securitization, derivatives, and ratings scams, were a critical piece - supplying money from investors throughout the economy - without which the bubble could not have grown to such size. Everyone was joking about NINJA loans, etc. It is unlikely that all those whose money was "invested" in all these securities, would have willingly bought these loans directly - especially at low interest rates.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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