Isn’t it remarkable that President Obama’s economic team is suddenly itching to return to academia? The latest economic advisor to give in to the clarion call of the classroom is Larry Summers, following closely on the heels of Christina Romer, who surprised her department chair by announcing that she’d be teaching this year. To be sure, in Summers’s case, it is not so clear that his Harvard colleagues are looking forward to his return—as President of the university he offended most of the faculty by arguing that women are inherently inferior when it comes to science. That was by no means the first time he behaved like a bull in a china shop. As chief economist at the World Bank he had argued that developing nations ought to serve as toxic waste dumping grounds for rich countries. He also wrongly claimed that California’s energy crisis in 2000 was caused by excessive government regulation—rather than by fraudulent dealings of Enron.
Still in terms of the real damage he has done, nothing comes close to his actions when he was serving Wall Street’s beck and call in the administration of President Clinton. He lobbied for repeal of the Glass-Steagall Act, letting banks get more involved in the securities business that blew them up in 2007. He also opposed regulation of the derivatives market, attacking the head of the Commodities Futures Trading Commission , Brooksley Born—perhaps the only member of the Clinton administration who had any sense about financial markets. Summers helped to ban the federal government from regulating credit default swaps, and helped to deregulate the commodities markets. Most importantly, he helped to make it possible for pension funds to speculate in commodities like food and oil. Thus, he contributed directly to the speculative frenzy that drove up gas prices at the pump, and inflated food prices that brought on starvation around the globe.
Wall Street immediately rewarded Summers with $8 million in consulting and speaking fees. Most amazing of all, President Obama thanked him for helping to create the global crisis by appointing him as top economic advisor in his administration. Summers was the gift that just kept on giving—to Wall Street. He helped to devise the bail-out that spent, lent, or guaranteed more than $20 trillion to rescue the financial sector. Whilst providing barely a few peanuts for main street.
There are probably only two individuals who bear more responsibility for the crisis than Summers—Robert Rubin and Timothy Geithner. As Treasury Secretary under Clinton, Rubin helped to hand economic policy-making over to Wall Street—most notably to his former employer, Goldman Sachs. We haven’t heard much from Rubin in recent weeks (since some rather embarrassing revelations of a somewhat sordid relationship he had with a younger woman). Of the triumvirate that oversaw the creation of the crisis, only Geithner remains on the front lines. As NY Fed president he stood idly by, watching those Wall Street institutions under his supervision as they manufactured the debacle. Apparently, Geithner never saw a risky practice he did not like. He famously told Congress that as head of the NY Fed he had never been a financial regulator—an accurate statement even if it utterly conflicted with his job description. For this failing, he was rewarded by Obama, who made him Treasury Secretary. Unfortunately, with the resignations of Summers, Romer and Peter Orszag, the weight of Geithner’s opinion rises—not a good thing.
And Orszag was recently replaced as budget director by Jack Lew, who now holds the position he held in the Clinton administration. Almost two years into the Obama administration and three years into this crisis, policy is still dominated by the Clintonites. Look, if the voters had wanted a Clinton, they could have had a Hillary. No doubt she would have brought in the Clinton team, with a somewhat more legitimate claim to the Clinton mantle than Obama enjoys.
The Clintons and their team firmly believe that they did a good job with the economy in the 1990s. That is belied by the evidence–their policies set the stage for the current economic collapse. They are the ones who unleashed Wall Street, allowing it to create toxic financial instruments that were designed to explode. They ran the budget surpluses that killed the economy—and left poor President Bush with a deep recession. In truth, there wasn’t much that Bush could do given the state of the economy except to allow Chairman Greenspan and Treasury Secretary Paulson to run serial bubbles to try to temporarily jump start the economy. The crash was inevitable—what goes up must come down, and by 2007 Wall Street had run out of borrowers willing to take on debt they could not possibly repay, and suckers willing to hold ever more debt that would never be serviced.
Two years on, there is still no hint that Obama wants change. Voters are tired of audacity. They were promised the audacity of hope, not the audacity to continue to shift income to the wealthy. And yes, the data are out. President Obama is presiding over the biggest wealth redistribution in favour of the rich the US has ever seen. 40 million Americans are on food stamps; 40 four million are living below the poverty line. And the rich are richer than ever before. This is not a coincidence—it was the Clinton strategy of shifting an ever larger share of GDP and corporate profits to the financial sector. The economy has collapsed under the weight of all that finance. And yet we still see no evidence that the President plans to change course.
L. Randall Wray is a Professor of Economics, University of Missouri—Kansas City. A student of Hyman Minsky, his research focuses on monetary and fiscal policy as well as unemployment and job creation. He writes a weekly column for Benzinga every Thursday.
He also blogs at New Economic Perspectives, and is a BrainTruster at New Deal 2.0. He is a senior scholar at the Levy Economics Institute, and has been a visiting professor at the University of Rome (La Sapienza), UNAM (Mexico City), University of Paris (South), and the University of Bologna (Italy).