Is Obama Doomed by His Economists?
Robert Rubin is, or was, one of the most respected minds of finance in the U.S. Rubin was a top executive of Goldman Sachs, Treasury Secretary for about half of Bill Clinton's presidency, and then a kind of director-at-large for Citigroup until January. His take on the financial crisis, as told to the Wall Street Journal in November, was "no one anticipated this." One reason to read Jeff Madrick's How We Were Ruined & What We Can Do is his dismissive challenge of Rubin's comment. Madrick raises questions not only about Rubin, but also Rubin's successor as Clinton's Treasury Secretary, Lawrence Summers, who currently serves as head of the National Economic Council for President Obama.
Madrick, writing in the New York Review of Books, points out that Charles R. Morris published "The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash" in early 2008, which "anticipated that the increasing gathering of mortgages into highly attractive investment devices thad made the financial system dangerously vulnerable." (Morris was not the only one who could see bad things coming -- another prescient pre-crash book was Mohamed El-Erian's When Markets Collide. And there were various economists of doom out there, including the self-styled Dr. Doom, Nouriel Roubini.) Obviously, a number of people saw bad things coming, and saw it far enough ahead that they could get books out before it happened.
Madrick also cites a series of articles in the New York Times which chronicle "the reckless decision-making in some financial firms in the years just preceding the crisis." These articles suggest that at the least, Rubin would seem not to have been the wise man he was meant to be at Citi -- the firm tripled its issues of collateralized debt obligations between 2003 and 2005.
The point is not to pick on Rubin. The point is to question Obama's economic team, laden with people who worked with Rubin and Summers, both of whom supported the repeal of Glass-Steagall in 1999, and generally were in favor of limited regulation over the financial system. Even so, Madrick says that there were rules in place for watchdogs to act effectively, but people like Alan Greenspan and SEC head Christopher Cox chose to not to use them.
The other reason to read Madrick is for how clearly he walks through how the mortgage-backed security went from useful hedge against risk to toppler of the world economy. Perhaps he cribbed it all from Morris and Mark Zandi, whose book "Financial Shock" is also discussed in this essay. Whatever the source, it's a good discussion.
As for his recommendations of what we can do now, though published in the Feb. 12 issue of NYRB, it was written January 14th, before Obama was sworn in. At that time, Madrick's perspective was that the government should "insure or even buy the better assets of the banks, which have fallen irrationally in value." He expresses concern that Obama's team had said little about how to slow mortgage defaults [a week later, he would hammer Obama's team in the Huffington Post]. It still is not clear how to slow this. Madrick himself doesn't seem to have great ideas: "There is no easy or cheap way to guarantee the bad loans, but ways must be found to slow the default rate."
Madrick concludes with this somber assessment:
Financial market participants created a financial bubble of tragic proportions in pursuit of personal gain. But the deeper cause was a determination among people with political and economic power to minimize the use of government to oversee the financial markets and to guard against natural excess. If solutions are to be found, the nation requires robust and pragmatic use of government, free of laissez-faire cant and undue influence from the vested interests that have irresponsibly controlled the economy for too long.That last bit, about how the regulators were being regulated, is to be expected from Madrick, who recently published "The Case for Big Government." Ironically, his NYRB essay shows that big government can be completely ineffective. That doesn't make him wrong; in fact, it echoes a powerful attack on regulators made by Michael Lewis and David Einhorn. The real question is whether the economists who have Obama's ear are capable of robust and pragmatic advice.
Madrick seems doubtful. He does give Obama's team more credit for trying to keep Americans from hoarding cash, via its stimulus package. Madrick thinks a second stimulus six months from now may be needed.
I'm not sure that's very good advice coming from Madrick. How about you, BNET? Do you think that other countries will be in a position to fund yet another big stimulus for the U.S. economy? If they are, will they? And, do the economists surrounding Obama have a clue?