The crucial test - who Obama picks for Treasury Secretary
Who Obama picks as a Treasury Secretary is going to tell us just about all we need to know about how far Obama is willing to break with the unfortunately named “neo-liberal” economic policies of free markets and free trade that have dominated U.S. economic policy since Ronald Reagan – including even under Bill Clinton. Through most of today, there was a diary on the recommended list on DailyKos, Summers' call for poisoning Developing World?, on the news today that Summers was at the top of Obama’s list for filling the cabinet post of Secretary of the Treasury. The resulting Dailykos thread quickly turned into a discussion of who might be an acceptable Treasury Secretary. Unfortunately, scanning that thread, it appears to me not many people understand that this is the most important fight Obama can undertake right now.
To understand why I assert this, I have to make perfectly clear where we are: the financial system is in ruins. The nearly $1 trillion “rescue” has failed to revive bank lending. Companies are now deliberately drawing down revolving lines of bank credit in the expectation that they will not be able to obtain any other financing - and their bank will soon disappear as well.
But even worse is that the world’s real economy is now quickly sinking into depression. Shadowstats.com, which has provided devastating critiques of official U.S. government statistics, reportedly now calculates the actual U.S. unemployment rate is approaching fifteen percent, with GDP shrinking at over two percent on an annual basis. Residential new construction has practically ceased, and now commercial construction is rapidly shutting down. A friend of mine says that the price of scrap steel has fallen from almost $300 a ton last year, to only $20 a ton last week. Why? Because the Chinese are no longer buying. And the Chinese are probably no longer buying because the American consumer, tapped out of credit, is no longer buying. Auto retail sales have plummeted by nearly a third. Bloomberg reported on Oct. 30 that Volvo AB’s European sales of heavy trucks fell 99.63 percent from 41,970 in the third quarter of last year, to just 155 this year. Bloomberg also noted that according to the Baltic Dry Index, which tracks the cost of shipping goods and commodities, it is now almost 90 percent cheaper to ship goods over the oceans than it was at the beginning of the year.
So, the crucial fight as Obama takes office is going to be to replace the reigning paradigm of “neo-liberal” economic policies with something that creates real economic wealth rather than unending series of ever bigger financial bubbles.
At the very beginning of the DailyKos diary is a link to a Bloomberg report that includes a short list of people Obama is considering for Treasury Secretary and other economic policy positions. If the list reported by Bloomberg is accurate, then we are in for a huge disappointment, as Obama will have crippled his administration at the very beginning, and will be unable to respond effectively because he is simply unwilling to think outside the box of “neo-liberalism.”
Let’s run down the list name by name.
Larry Summers is pretty well critiqued in the original DailyKos diary, though the diary fails to completely and adequately outline the fundamental details of “neo-liberal” economic ideas and Summers’s loyalty to them
Timothy Geithner is president of the New York Federal Reserve Bank and is a career bureaucrat. As noted in comments on the DailyKos diary, he also worked for Kissinger & Associates – the shady but powerful influence-peddling firm run by Henry Kissinger. Geithner has been one of the three most important people, besides Paulson and Bernanke, in shaping the response to the financial crisis so far. If you therefore don’t see immediately that the naming of Geithner would be a disaster, then you don’t understand the true dynamics of the mess we are in. What Paulson, Bernanke, and Geithner have been trying to do is save the financial system as it existed before the crises began. In other words, they are trying to preserve the bubble economics that “neo-liberal” economic policies inevitably creates.
Robert Rubin, Clinton’s Treasury Secretary you should know by now, is one of the key people who steered the deregulation of the 1980s and 1990s, which is what created the mess. (if you don’t you need to read the New York Times and Washington Post articles from about two weeks ago that recounted some of the history, and also discussed the role of Summers). Before serving under Clinton, he was co-chairman of Goldman Sachs. He now serves as chairman of Citibank. Unfortunately, Jared Bernstein, an economist at the EPI, recently co-authored a New York Times editorial with Rubin, which to my thinking helps “rehabilitate” Rubin. My reading of it was that it was almost entirely Rubin, with very little of Bernstein in it. Why Bernstein agreed to it is beyond my understanding at this time. Stirling Newberry summarized the editorial thus:
We need stimulus now, real wages need to rise in line with productivity, the benefits of trade must be used to offset the costs of trade - particularly to workers. But most importantly, and something that should have been obvious earlier: that the Wall Street and Main Street wings of the Democratic Party have the same interests. Wall Street provides liquidity and scale to Main Street, but ultimately Wall Street exists only if Main Street is better off with it than without it.
Newberry, I believe, has made a nice living working on or for Wall Street, so I think he is a good bit softer than I am. But then, Newberry is “successful,” and I am not (i.e., I am constantly worrying about paying my bills and where the next dollar is going to come from; I suspect that Newberry is mostly free of these concerns). Personally, I would Let Wall Street Burn.
On the other hand, my own recommendation for Treasury Secretary would be -- Stirling Newberry.
Paul Volcker has emerged as a wise old man, and has gotten good mention in many of Hale Stewart’s “Bonddad” diaries on DailyKos – all of which I vehemently disagree with as I quite unpopularly explained here:
By the late 1970s, the U.S. economy was beset with stagflation, a condition which mainstream economics had never thought possible. Probably because mainstream economics was still thinking in terms of a functioning industrial economy. So, when Volcker became Fed chairman in August 1979, a number of basic U.S. industries were in bad shape, particularly the bedrock industries: automobiles, steel, and machine tools. One of the Big Three car makers, Chrysler, was near bankruptcy. At the same time, the Hunt brothers had attempt to corner the market for silver, but had failed and were failing to meet margin calls. What Grieder details in his book [The Secrets of the Temple: How the Federal Reserve Runs the Country] is how Volcker confirmed the fundamental shift in Federal Reserve policy of Burns, by choosing to help the Hunt brothers, while letting Chrysler twist slowly in the wind. (Congress soon afterwards arranged an emergency loan for Chrysler). . . Volcker had fundamentally altered the rules of the game: it was now "What's good for Wall Street is good for the country." And the real, physical economy could go to hell -- and it has, taking millions of decent paying jobs and much of American prosperity with it.
So, again, I don’t think Volcker is a person that will help lead us to an alternative to “neo-liberal” economics.
There were a few other names that came out in the DailyKos discussion that I would like to comment on. Warren Buffet is probably the best choice, if – and only if – Obama has to, absolutely has to, select someone that is immediately familiar to the financial markets. There are many people who see Buffet as a good guy, because of his famous warning a few years ago that financial derivatives are weapons of mass destruction. But among the companies owned by Buffet’s Berkshire Hathaway is a little outfit call Kirby, which makes and peddles vacuum cleaners. You probably have been subjected to a sales pitch from a Kirby salesperson, and may even have had a home demonstration showing the truly amazing amount of gunk and crud left in your carpet by any other brand vacuum cleaner. What you probably didn’t know is that the poor kid giving you the demo is not likely to ever get paid for doing so– even if he happens to sell you a Kirby.
And, there are an awful lot of complaints of deceptive sales practices, with people tricked into signing loans for $1,000 or more. Yeah, that’s what I wrote: $1,000 for a Kirby vacuum cleaner.
But Buffet has conglomerated dozens of companies, so why do I bring up the relatively small Kirby part of his empire? Because it is symptomatic of the man. Buffet is a master at buying cheap and selling dear. In the case of Kirby, buying labor cheap. That’s what makes Buffet famous – he is the most famous “value investor” in the world. I honestly don’t think Buffet would be able to handle the Treasury job, which requires skills far beyond buying cheap and selling dear.
I am reminded of something I once read in the Collected Works of Abraham Lincoln. Not only does it bear directly on the question of buying cheap and selling dear, but it places the question in the much larger context of the economy of a nation. Also, I think getting people to realize that Lincoln has much of great interest to say on economics and banking. In fact, Lincoln scholar Gabor Boritt notes in his excellent book, Lincoln and the Economics of the American Dream that “in his public life Lincoln probably talked more about economics, to use the term in a broad sense, than any other issue, slavery included.” From Fragments on the Tariff, written by Lincoln between his election to Congress in 1846, and his being seated, in December 1847:
Then, it is said, that the best condition is when we can buy cheapest and sell dearest but this again, is not necessarily true; because, with both these, we might have scarcely anything to sell—or, which is the same thing, to buy with. . . These reflections show that, to reason and act correctly on the subject, we must look not merely at buying cheap, nor yet to buying cheap and selling dear; but also to having constant employment, so that we may have the largest possible amount of something to sell. This matter of employment can only be secured by an ample, steady and certain market, to sell the products of labour in.”
Jon Corzine, former Senator, now Governor, of New Jersey. Corzine was CEO and chairman of Goldman Sachs, so you have exactly the same allegiance to “neo-liberal” economics as you get with Rubin.
Paul Krugman, who recently won the Nobel Prize for economics, was mentioned a number of times in the DailyKos diary, but there is no evidence before the public yet that he is being considered for anything by the Obama team. Krugman is not mentioned in the Bloomberg report. My problem with Krugman is that he failed to see the role of speculation in extraordinary increases in the prices of petroleum earlier this year, and even wrote an article or two arguing there was no evidence of speculation. Also, I do not remember Krugman ever explicitly attacking “neo-liberal” economics.
Someone also mentioned Alan Blinder, who I also do not remember ever explicitly attacked “neo-liberal” economics.
So, is there anyone I like?
As I noted mid-way through, I would recommend Stirling Newberry, who has written some of the most insightful, powerful, and eloquent material on the financial crises, and on general economics, I know of. I provided one link above to an excellent, recent piece by Newberry. Here’s another, from September 20, as Wall Street was collapsing: The Constitutional Moment Arrives
Another excellent choice would be Henry C. K. Liu, founder of an investment company who has written extensively and repeatedly on the need to abandon “neo-liberal” economics. However, I am not certain Liu is an American citizen: I recall reading somewhere he was born in Singapore. You should bookmark Liu's web listing of his writings and spend some time letting your cranium feast.
The situation as I see it is that Obama has that all-important first year to get real change enacted and signed into law. But if he names as Treasury Secretary someone who truly rejects “neo-liberal” economics, the financial markets are going to react extremely negatively, and the resulting bloodbath in the financial markets will scare even the most stoic. More importantly (since the markets will recover eventually), the financial elites and corporatists will pour hundreds of millions of dollars into conservative think tanks like American Enterprise Institute, to fund the creation of all sorts of lying and misleading crap about “socialism” and “communism” that will then be flung by the wrong-wing screech monkeys – all in the service of preventing a move from “neo-liberal” economics, a move which will severely limit the freedom, influence, power, and more importantly, the profits, of Wall Street and the financial markets.
But, let’s face it: the wrong-wing campaign of lying and misleading crap about “socialism” and “communism” is coming no matter what Obama does. So I think Obama should just make the break with “neo-liberal” economics from the very beginning, and incur the wrath and fury of Wall Street immediately, by naming someone who clearly is not part of or sympathetic to Wall Street. Get it over with early, and save us all the waste of one or two years trying to do the impossible: fix a financial system that is broken, but which cannot be fixed because the system itself is the problem.