James Pethokoukis

Politics and policy from inside Washington

The impact of Dodd’s Senate departure

Jan 6, 2010 15:17 UTC

Some talking points/analysis on the  Chris Dodd retirement

  1. Makes it more likely Ds keep CT Senate seat, but also a sign of voter discontent with incumbents. Welcome to the U.S. Senate Richard Blumenthal, who says he will run.

  2. Makes it more likely that financial reform will be bipartisan, Dodd wants this to be a legacy moment for him. But the GOP may stall.

  3. I predicted Dodd would retire when he announced his support for Bernanke. (Yes!) Opposing him would have been the smarter political move.

  4. His Banking committee replacement in 2011 is likely Tim Johnson, considered friendly to the financial services industry. Hard to see a Glass Steagall repeal getting through a committee run by him.  Byron Dorgan, by the way, was a G-S guy and he is leaving, too. Sweeping financial reform happens now or never.

The campaign against Larry Summers

Jan 6, 2010 10:21 UTC

A quick exit for Larry Summers? That’s the goal of an incipient whispering campaign within segments of his own party. Detractors of the superstar White House  economic adviser blame his deficit-phobia for a skimpy stimulus and resulting jobless recovery in the United States.

Many Democrats fret that a toxic tandem of so-so economic growth and stubbornly high unemployment could cause huge losses in November’s midterm elections, perhaps even a loss of the House of Representatives. So let the Blame Game begin. In particular, an amalgam of influential liberal bloggers, New York Times columnist Paul Krugman, and even nervous White House and congressional politicos have concluded that the Obama administration erred in not pushing for a 50 percent larger stimulus plan than the $800 billion effort in early 2009 — or for a massive second dose of steroids since.

Summers has been central to those decisions. He has argued that while government can partially fill the economy’s output gap, overdoing spending — and borrowing to fund it — would spook global bond markets. Such reasoning annoys Washington liberals, as it did during the Clinton years when much of the left-wing, “Putting People First” agenda lost out to the deficit reduction advocated by Treasury Secretary Robert Rubin, Federal Reserve chairman Alan Greenspan and, yes, Summers. A near-trillion dollar stimulus plan and trillion dollar deficits apparently just aren’t enough when you have visions of coast-to-coast high-speed rail and a modern-day WPA program dancing in your head. Given the kvetching on the left, you would almost think Summers was pushing for a crash balanced budget.

It’s the same brand of deficit hawkishness liberals see at work in the healthcare reform process. (Amazingly, a $900 billion plan that will almost certainly expand the budget deficit is still too fiscally strict for these folks.) Many Dems also sniff at Summers’ past employ at hedge fund DE Shaw. Hey, what value could experience outside of academia and government possibly have, right?

But Summers is certainly right to focus on controlling government deficits. Uncle Sam has at least $10 trillion in new debt to sell over the next decade and needs to maintain investor confidence. Bond fund giant Pimco, for instance, is already cutting back on Treasuries because of the flood of new issuance.

Even dyed-in-the-wool Keynesians should also concede that government borrowing can become excessive. A stunning new study by Carmen Reinhart and Kenneth Rogoff found that when government debt-to-GDP levels rise above 90 percent in advanced economies, annual GDP growth falls by one percentage point or so. The International Monetary Fund projects that America’s debt-to-GDP ratio will reach 94 percent this year.

Summers isn’t going anywhere right now. Imagine the strange optics of axing the White House’s economic guru just when President Obama is arguing that his policies are slowly righting the ship. But should the economy dip again or November’s elections prove disastrous, there will be a political price.

And while the high-profile Summers is near the top of the list to pay it, he might not be the only one. The left, brimming with anti-Wall Street fervor, would also like the president to give Treasury Secretary Timothy Geithner his walking papers. An obvious replacement would be JP Morgan CEO Jamie Dimon.

But liberals want no part of ex-Wall Streeters or ex-Clintonites. So who would that leave to replace Summers or Geithner? Who would be on the liberal short list for an Economic Policy Dream Team besides Krugman and Biden adviser Jared Bernstein?  (Certainly no one in favor of cutting taxes.) Financial markets would probably love to know.

Of course, the real problem for the anti-Summers crowd is Barack Obama himself, the man “progressive” columnist David Corn said has already left liberals “alienated from politics today.” Obama’s instincts, along with real political and fiscal limitations, seem to consistently push him toward center-left economics. But the White House isn’t like a baseball team where it’s far easier to fire the manager than get rid of problem players.

COMMENT

Larry Summers ran over my dog!

Posted by B. Salem | Report as abusive

Is Larry Summers on his way out?

Jan 5, 2010 17:55 UTC

The anti-Larry Summers buzz grow louder ( such as here, here and here.) There is a lot going on here. Liberals blogs have been all over him for pushing the $800 billion stimulus plan instead of the $1.2 trillion option presented to Obama by Christina Romer.  Liberals, including Paul Krugman, thought it was too small then and have double-downed on that opinion since.  (Alas, no high speed rail or modern-day WPA program for them.)

And the fact that the WH seems unwilling to propose some sort of massive second stimulus that focuses on jobs only makes matters worse — that even though their original unemployment forecast has proven far too optimistic. Then there was a quote from Summers who said the first stimulus wasn’t even supposed to boost jobs as opposed to output.

Not that liberals have ever loved Summers. He was part of Team Clinton which chucked the left-wing agenda in favor of deficit reduction. There was his stormy tenure at Harvard. And Summers worked at hedge fund DE Shaw, a  big no-no since the financial meltdown.

And all of this happens alongside healthcare reform, which liberals are angry about since deficit concerns helped deep-six the public option.

Unless the economy double-dips, I don’t seem a major shakeup on the WH econ team before the midterms. If the midterms go badly for Dems, though, Summers might depart. Maybe Geithner, too.  Though who would replace them if Wall Street folks and ex-Clintonites are off limits with an angry base?  Mark Zandi?  Jared Bernstein from the Veep’s office? Leo Hindery? I could see Rahmbo at Treasury, though.

COMMENT

Pretty smart guy, this Summers, much smarter than I. Failed, though, to connect the dots on derivatives and the monstrous distortions caused by the GSEs. Bit of a blind spot, it seems. Like so many at that level of power and intellect, probably too lost gazing at his own reflection to realize his worldview is a narrow as a country cracker like me. Too bad, really, having one’s name remembered as the voice of reason for encouraging an $878 billion stimulus to nowhere instead of one above the $1 trillion mark. But, whether he likes it or not, he is just a Keynesian now, part of our gang sending the dollar to the outhouse, industry to India, and kicking liberty to the curb. If he is on his way out, it just proves that intellect and common sense are mutually exclusive.

Or, maybe he is showing his handlers that he has got some serious buyers remorse with all the spending on political puffery? Nah, probably just too many egos in the room.

Lazy Jack

A timeline for the financial crisis

Jan 4, 2010 20:42 UTC

Responding to Ben Bernanke’s defense of Fed interest rate policy, my pal Barry Ritholtz lays out a crisis timeline (the only thing missing is various US housing policy initiatives):

An honest assessment of the crisis’ causation (and timeline) would look something like the following:

1. Ultra low interest rates led to a scramble for yield by fund managers;

2. Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;

3. Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;

4. These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.

5. Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as TripleAAA.

6. That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.

7. Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;

8. More leverage took place in the shadow derivatives market. That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.

9. Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside. This (logically) led to increasingly aggressive and risky activity.

10. Once home prices began to fall, all of the above fell apart.

COMMENT

As of coming out of recession, there is an economic growth but slow. Financial crisis is prevented by Fed’s ability. It shows the impression that banking and private-sector is the reason behind this whole credit collapsed and mess.
http://www.mikeastrachan.com/

Posted by Nikkilarsson | Report as abusive

How does the U.S. economic recovery compare to past ones?

Jan 4, 2010 19:57 UTC

This handy chart comes courtesy of David Rosenberg of Gluskin Sheff:

recovery010410

COMMENT

Mr. Pethokukis,what is your take on your ancestoral place’s debt problems whether it is due to capitalistic or socialistic policies?Is excessive debt necessary for long term growth?

Posted by schadha100 | Report as abusive

Black swans, good and bad, for 2010

Jan 4, 2010 19:40 UTC

A classic predictions piece from economic analyst Ed Yardeni crosses my desk. First, excerpts from his bullish Black Swans (70 percent probability, he says):

1. The Old Normal trumps the New Normal. The US economic recovery is par for the course.

2. Unemployment subsides faster than expected. The unemployment rate peaked at 10.2% during November 2009; it falls to 8% by the end of 2010.

3. Consumer spending leads the recovery in 2010.

4. The federal funds rate ends the year at 1%.

5. Inflation remains subdued, with the core CPI inflation rate remaining under 2%. While most commodity prices continue to move higher, the price of oil drops to $60 a barrel on ample supplies. The dollar continues to rally in 2010.

6. Stocks-and profits-are stronger than expected. Stock markets around the world (including the US) rise to record highs by the end of 2010.

7. The federal budget deficit starts to narrow, and stress on state and local budgets starts to lift, as a result of better-than-expected economic growth

8. The Obama administration turns more centrist after Congress passes a token health reform bill that alienates the left wing of the Democratic Party. Nevertheless, the Democrats lose their majorities in both chambers of Congress in November.

9. The Iranian government falls and is replaced by a more democratic regime.

10. The Bush tax cuts are extended, following the congressional elections and before year-end. (Fairy tales can come true and usually have happy endings.)

Now his bearish Black Swans (30 percent probability):

1. The US economic recovery is subpar. After rising 4% during Q4-2009, real GDP grows by only 1%-2% during the four quarters of 2010.

2. The unemployment rate rises to 11% by the end of 2010.

3. Consumer spending is very weak due to rising unemployment. Housing starts and home sales decline as mortgage rates and foreclosures rise. Home prices fall.

4. The Fed keeps the federal funds rate near zero through year-end, and is forced to continue buying Agencies to avert a complete housing collapse.

5. Inflation concerns give way to fears of deflation.

6. Stock markets around the world plummet again, led by bank stocks. Sovereign debt crises in the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) spill over into Japan, the UK, and even the US.

7. More bailouts and stimulus programs expand the federal budget deficit on a cyclical basis to another record high.

8.The Obama administration turns more leftist after Congress passes a health reform bill–and pushes for even higher taxes on the rich. The Democrats narrowly hold onto their majorities in both chambers of Congress in November.

9. The Iranians crack down on the pro-democracy movement. Tensions in the Middle East intensify, particularly between Israel and Iran. The price of oil soars over $150 during the summer, but then tumbles.

10.  The Bush tax cuts expire. This sets the stage for another recession in 2011. Future historians describe this period as the “Second Great Depression.”

He also gives his “known unknowns”:

1. Will employers expand their payrolls as they normally do at this point in the business cycle? Or will we have a jobless recovery?

2. Will consumers save more? Or will near-zero interest rates discourage thrift? If consumers pour more money into stocks to get better returns, might the resulting positive wealth effect boost their spending on goods and services?

3. Will higher taxes depress consumer and business spending?

4. Is a second wave of foreclosures ahead? Might higher mortgage rates put a lid on the upturn in home sales?

5. Or, will a normal inventory-rebuilding cycle set the stage for self-sustaining economic growth? In the past, fiscal and monetary policy stimulus measures were no longer needed once self-sustaining growth kicked in. Is this time different?

6. If the private sector deleverages, will the government continue to leverage even more? Will mounting concerns about the creditworthiness of sovereign debt stymie the ability of governments to continue to prop up economic growth?

COMMENT

Neither the bull or bear scenario is likely.

Many of the scenarios contradict one another. Example an amazing recovery AND the GOP wins both House of congress. Very unlikely that BOTH those would happen.

Iranian regime will not fall, but that has nothing to do with the economic recovery, at least short term.

The economy can recover AND helicopter Ben will leave the Fed Funds Rate near 0%. With this Fed they can be exclusive.

Posted by ekaneti | Report as abusive
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