Underestimating the Great Recession

I’ve been reading this excellent David Leonhardt “hindsight quarterback”-style article on the mistakes the Obama administration made when handling the economy in 2008.  I suppose I like it because he’s saying many of the same things today that I actually was writing about back then.  However, the problems from back then are more obvious now and the article is written without the dynamics of the Larry Summer/Timothy Geithner  Beavis and Butthead antics that were apparent in the Suskind book Confidence Men.   I’ve often said that the two biggest mistakes were the size of the stimulus and the handling of the housing crisis.  I still can’t figure out how we got a bail out of the auto and financial industries but the housing sector got left to the natural path.

With the auto industry and Wall Street, Mr. Obama accepted the political costs that come with bailouts. He rescued arguably undeserving people in exchange for helping the larger economy. With housing, he went the other way, even leaving some available rescue money unspent — at least until last year, when the policy became more aggressive and began to have a bigger effect.

No one of these steps, or several other plausible ones, would have fixed the economy. But just as the rescue programs of early 2009 made a big difference, a more aggressive program stretching beyond 2009 almost certainly would have made a bigger difference. It would have had the potential to smooth out the stop-and-start nature of the recovery, which has sapped consumer and business confidence and become a problem in its own right.

It would seem prudent to stabilize housing prices in an economy that’s highly reliant on consumer spending when consumer spending is highly reliant on household wealth.  That’s not to say that the house prices of 2006 weren’t in need of a correction.  It’s more to say that putting so many folks through disclosure and wrecking their balance sheets for decades isn’t the smartest way of managing an aggregate demand crisis in an economy where consumption is 68% of GDP and the fickle investment component is about 17%.

Leonhardt thinks that Obama and his advisers really didn’t grasp the severity of the recession or the full impact of the financial market meltdown.  I would agree with this up to a point.  I actually think they knew the impact but concentrated on the business sector more than than the household.

Mr. Obama’s biggest mistake as president has not been the story he told the country about the economy. It’s the story he and his advisers told themselves.

The notion of insurance is useful here. Suggesting that Mr. Obama and his aides should have bucked the consensus forecast and decided that a long slump was the most likely outcome smacks of 20/20 hindsight. Yet that wasn’t their only option. They also could have decided that there was a substantial risk of a weak recovery and looked for ways to take out insurance.

By late 2008, the full depth of the crisis was not clear, but enough of it was. A few prominent liberal economists were publicly predicting a long slump, as was Mr. Rogoff, a Republican. The Obama team openly compared its transition to Franklin D. Roosevelt’s and, in private, discussed the Reinhart-Rogoff work.

I guess this does tie back to the dynamics in the Suskind book Confidence Men and the dynamics of Obama’s economic team which basically was presented as being completely out of control.  This quote is Adam Moss’ take on the situation.

The news of the book,according to some reports, is that Tim Geithner was insubordinate to the president, pursuing his own pro-banker agenda. Or, according to other reports, that Larry Summers was insubordinate to the president, pursuing his own — well, monomaniacal agenda. I’d add that it’s also about Rahm Emanuel being insubordinate to the president, just because. Basically, it’s about the presidency being hijacked by these three guys. And the guys thing is important because they’re pretty awful to women. Anyway, they’re the villains. Paul Volcker, Christina Romer, and Elizabeth Warren are the heroes. Bankers win, America loses.

We’ve had Sheila Bair out on the book trail reinforcing the Geithner pro-banker agenda story line just this month. He’s the last man standing  of the trio of “villians’ mentioned above.

In addition to accusing Geithner of treating the banks with kid-gloves, Bair skewers him and former Obama economic adviser Larry Summers for their approach to the housing crisis, saying they didn’t appear to care about helping homeowners or fixing underlying problems plaguing the housing market.

Treasury’s housing-relief program was “designed to look good in a press release, not to fix the housing market,” Bair wrote. She says Geithner and Summers undercut Obama by not pursuing a more aggressive program.

Whether intentional or not, the administration’s housing programs have been lackluster, making the narrative all the more damning. The housing market is recovering but more because of the Federal Reserve’s push to lower interest rates than because of the housing assistance offered by Treasury. The main programs have helped about 2.6 million homeowners, far short of the 9 million Obama promised to help avoid foreclosure.

As Bloomberg View has written, Geithner and other administration officials cared too much about avoiding “moral hazard,” designing the programs so narrowly that few could actually qualify for help.

Bair’s book suggests that those same concerns didn’t apply to the banks, who were stuffed with money she says they may not have needed and didn’t deserve without fundamental changes to their businesses. (Fed Chairman Ben Bernanke, meanwhile, told the Financial Crisis Inquiry Commission that “only one” of the major banks “was not at serious risk of failure” and that 12 were on the verge of collapse in 2008.)

Here’s a similar narrative on the questionable approach to the housing market crash.  I want to mention this because it actually reinforces the Romney 47% narrative in action.  For some reason, bad business decisions aren’t demonized with the same gusto given to those made by the middle income, working class, and poor households.  We’re “lazy” and seek a way to become “dependent” on government.   What we should emphasize is the number of times that businesses–big and small–go to the government asking to be protected from competition and to be given price supports, subsidies, tax breaks, tariffs, and trade quotas.  All of these create moral hazard, distort market outcomes, and are of little value to any one but the industry receiving the hand out.  Rahm, Geithner, and Summers are all part of the mentality that Romney so eloquently got caught describing to his peser in his 47% moment.  The media gets caught up in that narrative too.  Let’s not kid ourselves that this kind of thing will go away once Romney is soundly defeated.   It goes on behind all closed-door meetings concerning policy.   Most of the consultantariat have similar frames.  This is especially true for those that go to big name universities where they are repeatedly told  they are “special’ and above every one else and are more deserving of success than any one else.

The one thing that I would really like to see right now is for Obama to restate his intention to replace Geithner.  Then, I would like to see him signal who is on the short list.  This would let us know if we’re going to some change in the approach to the recovery.  Can you imagine the signal that a Sheila Baer appointment would send?  I can.  The markets would definitely fall off their highs.  That’s exactly why I’m not holding my breath for anything but more status quo.  At this point, it’s the best we can hope for because we all know what the Ryan/Romney agenda will be.  I’m not keen on going off of their cliff any time soon.  I just wish we had a bit more details on how the President intends to manage the recovery in a second term.  We’re not getting any details and that makes me nervous.


32 Comments on “Underestimating the Great Recession”

  1. ecocatwoman says:

    Super, kat. Though the farthest thing from an economist, I told friends & anyone else who would listen from the beginning that homeowners should have been part of the bailout. Sure, some did dumb and/or greedy refinancing, but the massive amount of foreclosures hurt the value of the homeowners that weren’t in trouble. They’ve devastated neighborhoods.

    I would love to see Sheila Bair take Geithner’s place, as I commented yesterday. Fingers crossed, but I’m not sure Obama has the cojones.

    One thing about your post –

    he’s saying many of the same things today that I actually was writing about in 2013.

    Thought you might want to fix that.

  2. Pat Johnson says:

    Here is a simplistic approach:

    How do they go about getting me out of the house to spend more in the marketplace that is a guarantee for increasing the bottom line, assure more hiring for those needed to fill the demand for goods and services, and keeping the tax rates on my property from being raised to meet the federal deficit shortfalls?

    It stands to reason that if I have an extra 20 bucks in my pocket I may well spend it on a pizza, a new cd, a pair of boots, or another Kindle book.

    Without that 20 bucks the economy goes stagnant. People are laid off, small business close their doors, the paperboy goes without a tip.

    The difference is in the “confidence” of appreciating I may have another 20 bucks to look forward to that will permit me to part with the one in my hand.

    But without the expecation of “help being on the way” that 20 bucks stays right where it is.

    • dakinikat says:

      Also, the $20 given to you is more powerful the same amount given to the rich or to business because you will spend it. Business could sit on it or spend it an on overseas expansion. The rich will likely dump it in their investment account on the Cayman Islands.

  3. Pat Johnson says:

    Exactly. I may spend it on a slice choice of steak rather than a cheaper lb of hamburg which goes through the hands of farmers, suppliers, the trucker, the market itself. Everybody gets a piece of it.

    The rich will never feel the loss or the increase one way or the other. They have it all and more. Unless owning multiple McMansions is considered “good for the economy” then I am living on the wrong street.

    They need to work on what it will take to part me from the little “windfall”. Until that confidence is restored you’ve got “bupkus”.

  4. Pilgrim says:

    It is true that Geithner, Summers and Emmanuel flouted Obama at many a turn. It is also true that Obama persisted in favouring them and putting down Volcker, Romer and Emmanuel.

    • Pilgrim says:

      Volcker, Romer and Warren.

    • bostonboomer says:

      Actually, Obama hated Emanuel and never wanted him as Chief of Staff in the first place. Once he got more in control, the first thing he did was clean house of Emanual and Summers.

      • Pilgrim says:

        Why, then, did he have Emmanuel as chief of staff, I wonder.

      • bostonboomer says:

        According to Confidence Men, Obama was talked into accepting Emanuel as Chief of Staff by other former Clinton advisers because Emanuel understood Congress. But Emanuel is also incredibly abrasive and he kept undercutting Obama. I don’t have the book handy right now, but there was also a long piece in the WaPo about this around the time that Obama cleaned house.

        Obviously, as we all expected Obama was so inexperienced that he allowed a lot of his advisers to ignore his wishes. The biggest one was when Geithner repeatedly ignored Obama’s orders to let Sheila Bair take some of the big banks through bankruptcy.

  5. bostonboomer says:

    Excellent analysis, Dak. Really interesting. I agree with Adam Moss. From my reading of Confidence men, Obama did allow a number of his advisers to be insubordinate. Geithner and Emanuel got away with murder. Larry Summers actually wanted a bigger stimulus, and it seemed that Geithner and Emanuel cut Summers out of decisions. Geithner wanted to help the banks only and Emanuel wanted to be conservative in order to get it through Congress.

    On the other hand, Emanuel hated the health care law, and he lost on that one. It was Obama who really made up his mind to do that, but he made too many compromises. I think Obama could be a lot stronger in a second term now that he has more experience.

    The only thing I worry about is that he’ll replace Geithner with a conservative like Erskine Bowles and go ahead with cutting Social Security and Medicare. But after what he’s seen in this campaign, Obama has to know that’s not going to go over with most Americans.

    • Pilgrim says:

      Well said. I agree, with the caveat that I’m not sure about the “Obama has to know….” part.

      • bostonboomer says:

        Really? Obama is ahead in the polls to a large extent because of Romney/Ryan’s desire to take down medicare. Obama isn’t stupid.

      • NW Luna says:

        I hope Obama is a sharper negotiator in his 2nd term, and no longer starts out with an offer to yield on something. He has put aspects of Medicare and Social Security on the table before.

        Not sure if the average voter knows what R/R would do to Medicare & SS. But they do know Romney’s a rich guy who doesn’t care about them.

  6. ecocatwoman says:

    Personally, I think the presidency is a trial by fire. From the outside, I doubt anyone can comprehend what a tough & constant job it is. I think Obama has had some epiphanies while in office & I also think that Michelle is one smart woman. I don’t doubt that she doesn’t hold back her advice nor her opinion. The real variable in this equation is how much change will we see in both the Senate & the House.

    • Pat Johnson says:

      Obama having Rahm Emanuel as his chief of staff was illustrative of our collective doubts about his inexperience from having spent so little time in the Senate and getting familiar with the players and the process itself. Rahm knew how to maneauver his way through but he was a royal pain in the ass.

      Keep in mind that Obama was a professor, one who allows students to argue their points of view which may have accounted for much of the “insubordination” he was up against with these divas.

      BostonBoomer may be a better judge of that since she has taught on that level, probably allowing her students to argue their points of view while hoping they reach a concensus which only comes when all opinions have been heard.

      I should say this applies to dak as well since they have faced students and are familiar with a classroom format.

      • bostonboomer says:

        The way Suskind describes the meetings, Obama would sometimes get disgusted and leave the room–telling the advisers to come to a conclusion and get back to him. I think that was a big mistake. At those times, Emanuel and Geithner undermined him.

      • dakinikat says:

        I think some of that has to do with being a law school professor since you’re essentially teaching students to argue cases. In my fields, we tell students to stick to the facts and the data. One explains results more than one argues sides. You have to make your case based on reliable data not based on interpretations of previous laws that you have to argue apply to a particular case.

      • Pat Johnson says:

        But you guys know what I mean: your positions as full fledged academics offers a different approach via attitude in trying to reach the students.

        I think that was what was evident in Obama’s approach to these “beauties”. From what I have read about him so far he is more of a pragmatist and tries to find compromise when sometimes it is just not there.

        I think it is often a question of temperment as well. I remember how offended we were when he brought Bill Clinton to a news conference then left him at the podium to head back to the living quarters and we took that for “arrogance”.

        The truth is is that he had given his word to Michele that he would be there for every dinner hour he was in the WH because this was one promise he made her in an effort to get her to agree to his run for POTUS. She stressed the need for his gurls to experience as much of a normal home life as possible.

        Somewhere in his character there is more to him that we have seen.

      • bostonboomer says:

        I agree, Pat. Obama is not a strong extrovert, and I think what often looked to me like arrogance and dismissiveness was were really signs of a person who is standoffish. That is the complain we keep hearing about him from donors and supporters. I do think he has some arrogance, but I think he has learned some humility from his experiences during his first term. I hope I’m right.

      • ecocatwoman says:

        I agree that he is pragmatic & Woodward or someone recently said that Obama isn’t a schmoozer. I’m not sure if he (whoever) called him an introvert, but that seems likely to me. I’m definitely an introvert & am uncomfortable in groups of people I don’t know & I can’t stand small talk. I’m a manager & I have to let my employees state their cases, then talk to others to get their POV on the incident & make a decision. Many of my employees over the years have complained that “nothing gets done around here”, meaning I don’t chop off someone’s head when another employee complains about something the other did. It’s not easy to keep everyone happy & working well together. I often feel as if I’m supervising a kindergarten class. Trying to give everyone their due & balancing the good of “the cause” with a highly functioning work force so that we can achieve the necessary goals often drives me crazy. I cannot imagine what it’s like for Obama dealing with the blustering, whining, complaining politicians who act like children & expect to be treated like adults.

  7. Pat Johnson says:

    The difference between Biden and Obama is telling.

    Where Biden has been around congress since 1969 and has the gift of gab of a parish priest, Obama is more inward. From what I have read about him, he sets aside a few hours of “alone time” after 10pm when Michele goes to bed to write and read in private.

    We all loved the fact that Bill Clinton kept his staff up at all hours but he too is a different beast. A politician born to the role who did not like being alone as opposed to one who values time away from the fray.

    I too hate “small talk”, endless meetings that solved nothing, and having to “schmooze” with people who didn’t really interest me to be honest. I can understand where he might be coming from.

    I used to lock myself in the bathroom for a 5 minute break from 4 kids who expected me to manage EVERYTHING and I felt guilty in the process. It wasn’t until I began to meet more women like me who confessed to doing the same thing that I felt “normal”.

    Sometimes you need to recognize just what it is that requires a break before you become so overwhelmed there is no room for yourself.

  8. mjames says:

    Well, I guess we know a few things. Obama has no backbone, no Democratic principles, no self-confidence, no morality (lying means nothing to him), and no interest in working hard at his job. Also, he tends to worship those men (men only) who have achieved some measure of “success” in life, no matter how undeserved. The notion that he may have allowed the tougher guys (Geithner, Summers, and Emanuel) to run the show speaks to why Obama should never ever have been elected President. He was not up to the job – he never did any job very well or for very long as far as I can see – and he is still not up to the job. IMO, he is a lazy, arrogant suck-up with a God complex, all of which cover up feelings of massive insecurity and inadequacy (which, BTW, he should be feeling).

    Therefore, since he is a coward with no moral compass (as well as a Wall St. patsy), do not expect him to change course in any way during his second term. We are hearing nothing at all about his plans for a second term (no one’s talking) because he has no plans (like always), except that he is itching to serve his true masters by dismantling Social Security and Medicare. He has not made any promise not to cut those programs and, quite frankly, I wouldn’t believe him even if he did. The die is cast. (He is also a trigger-happy war criminal, which, oddly, doesn’t seem to get much attention). Expect nothing but the worst.

    Of course, it is true that Romney is massively unfit. Massively. Unfit. (And Ryan would be farcical if he weren’t so entrenched with the Villagers, which makes him downright scary.)

    The hell with them both. Things are about to get much much worse. How long can people go without work, or income, or housing, or food? Take away what’s left of the social safety net and not only are these fools ensuring widespread misery (and no taxable income), they are setting the stage for massive social disruption (including a huge increase in violent crime).

    OK, enough ranting for today.

  9. pdgrey says:

    Wowzers! I have to work and miss three great post and links. May i also say how good the comments are. So all i got is a 6 month old funny from Martin Short

  10. RalphB says:

    Republican GOTV effort in full swing, I guess. Lying assholes!

    Call from Clay County GOP: Obama is a Muslim who’ll take away Medicare

    TALLAHASSEE – In audio picked up by an answering machine, a volunteer for the Republican Party of Clay County can be heard calling President Barack Obama “a Muslim” and saying he wants to “get rid of your Medicare” while reaching out to voters in support of Mitt Romney’s campaign.

    The call was made as part of a statewide phone bank for Romney’s campaign being conducted by the Clay County GOP.