Underestimating the Great RecessionPosted: September 29, 2012
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.