Summers at Treasury: What Would We Tell the Children?
TPM Café (Talking Points Memo), November 7, 2008
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Former Treasury Secretary Larry Summers' name is consistently placed prominently on the list of candidates to be President Obama's Treasury Secretary. This is rather striking since the policies he promoted as Treasury Secretary and in his subsequent writings led to the economic disaster that we now face.
As Treasury Secretary, Summers embraced the high dollar policy promoted by his predecessor Robert Rubin. While it offered short-term benefits in the form of cheap imports and lower inflation, the high dollar also produced a large and growing trade deficit. Just like tax cuts that cause unsustainable budget deficits, the high dollar policy of the Clinton years was unsustainable over the long-run.
Trade deficits also sap demand. In Summers' Treasury years, this demand gap was made up by a consumption boom, which was in turn driven by the stock market bubble. Like the rest of the Clinton crew, Summers cheered on the stock bubble.
Of course the stock bubble was not sustainable and when it collapsed in 2000-2002, it threw the economy into a recession. While the official recession was short and mild, the economy continued to shed jobs for almost two years after the recession ended. With the over-valued dollar causing the trade deficit to continue to rise, the only way to sustain demand was another consumption boom, this one driven by the housing bubble.
Greenspan kept interest rates at 50-year lows, while the housing bubble expanded to ever more dangerous level. Summers was no longer Treasury secretary at this point, but he did have ample opportunity to weigh in on a wide range of policy issues. While he offered his wisdom on a variety of economic issues during the housing bubble years, he never bothered to take note of an $8 trillion housing bubble or the catastrophe that its collapse would cause.
Silence was not Summers only contribution to the growth of the housing bubble. As Treasury Secretary, he had been a vigorous advocate of the one-sided financial deregulation (the Wall Street big boys all want the government security blanket of "too big to fail"). In particular, Summers had worked alongside Robert Rubin and Alan Greenspan to prevent any regulation of credit default swaps, an instrument that helped provide the financial fuel of the housing bubble.
The collapse of the housing bubble has left one-fifth of homeowners underwater in their mortgages, owing more than the value of their house. Tens of millions of homeowners now find themselves at the edge of retirement with almost nothing other than their Social Security to rely upon. And the economy will quite likely experience the worst recession since World War II as it struggles to overcome the loss of $8 trillion in housing bubble wealth.
Given this record of failure, the question is how can Larry Summers still be considered for the top economic position in the Obama administration? This would be like appointing the arsonist who burned down the city as the new fire commissioner. We like to tell our children that success is rewarded and that failure is punished. But if Larry Summers ends up as Treasury secretary, what are we supposed to tell the children?
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.