There is a nice profile of Larry Summers and the rest of the Obama Economic crew in the New Yorker by Ryan Lizza, while its long and buttery in sections, the interplay between Obama’s economic advisors was fascinating in showing how the various policies were shaped, especially the stimulus, the Public-Private-Partnership, and the auto bailout. These policies have all been broadly unpopular across the board, and the internal debate shows that not even the entire staff has been on board with some of these policies. But those doubts were voiced, and the prevailing arguments are laid out for the first time, that I know of, in this piece.
For the record, I was mostly supportive of the stimulus, as a one-off cost it’s fiscally negligent since with inflation overtime, and dollar denominated debt, over time is gets smaller and smaller; it’s the kind of the deficit that “doesn’t really matter”. However, the size of it was questioned, and this exchange is great in how it shows Christina Romer actually proposed a $1.2 Trillion stimulus package, but that it was never even proposed as a option, due to political realties:

The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”
There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”
There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future.
Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.
Summers, Romer, Geithner, Orszag, Emanuel, and Jason Furman huddled in the corner to lock down the number. Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars.

Of course, the output gap is difficult to measure, some say it was more, others less. Regardless, the true constraint was always political. Even before they took office, the administration was bending over for public opinion, and in many ways went against Romer’s theory that ‘overwhelming force’ was needed to fill the output gap. Right now, it looks like the political advisor’s were right, and the insurance has keep us above water. Yet, by this point in the Great Depression everyone though we were out of the woods too, thanks to New Deal’s Alphabet programs. Lets reassess the effectiveness in two more years time.

So while Romer was tasked with saving the economy, Time Geithner was tasked with fixing the source of the crisis, the banks.

I’ve written about Tim Geithner’s policies towards the banks before. At the time I expressed confidence that his plan would work, if only for the shear ‘head I win, tails you lose’ aspects. Personally, I would have liked to have seen an FDIC-style take-over/’nationalization’ of the weakest big banks, shown that “Big-Banks can fail”, and sold off the carcasses piecemeal. It’s hugely expensive up-front, but you usually end of getting your money back, and can even turn a profit in some cases. This approach was rejected in favor of the ‘Public Private Partnership’, and I finally know the logic why:

On Sunday, March 15th, Geithner was summoned to the White House for a meeting with the President and his senior aides about whether Obama should adjust Geithner’splan—or scrap it and come up with something else. Geithner did not go unprepared: he brought with him his advisers Lee Sachs and Gene Sperling, who ran the N.E.C. during the Clinton Administration, and six other staffers. Geithner had a line he often used that summed up how he and his colleagues at Treasury would prevail: “Plan beats no plan.” The meeting lasted seven hours. Obama’s advisers were so divided that he left them in the Roosevelt Room after the first two hours, saying, “You guys work this out, and when I come back I want you to tell me what your agreed-upon approach is.”
Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”
Summers played the role of “the ultimate murder board,” according to Sperling, making the Treasury officials defend their ideas the way a Ph.D. student must defend a dissertation. He challenged and provoked Geithner to make sure that he had thought through every aspect of the plan. They argued back and forth, as they had done in the Clinton Administration, and their intensity was often jarring to the other Obama advisers. Summers didn’t trust the regulators, and was particularly worried about whether the stress tests designed by them were sufficiently tough on the banks. He pointed out that, in the days before Lehman, Bear Stearns, and Washington Mutual crashed, the same regulators had said that capital at those institutions was more than adequate.
In the end, though, Summers acknowledged that there were no better options, and Geithner’s plan survived intact. On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.
The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)
Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.

We also know that David Alexrod was displeased with the Bank Bailouts in particular saying: “I ran a small business for twenty-three years,” he said, referring to his political-consulting firm. “If I went broke, nobody was going to come in and save me, and if I didn’t do well in a given year then I didn’t take a large bonus and neither did anybody else. And that’s the way most Americans operate.” In this instance, policy beat out politics. Banks and Bankers are hugely unpopular. While the stimulus can have an effect in people’s everyday lives, bakers are seen as responsible for the mess, and they are. Any program that looks to benefit them is not going to be popular. The cathartic process of shutting down big-banks and firing the management, was one of the lesser, but very real reasons I favored ‘nationalization’ /pre-packaged bankruptcy. Yet, as I read this it would seem that lack of available funds was the only constraint placed on Geithner’s plan. This may be a large part of the reason why the banks have come back fastest and strongest, dispite being the most pummeled and epicenter of the crisis.

… yeah that pisses me off just a bit. To this day the biggest failing of the Obama administration has been it’s failure to hold anyone to account for their contributions in creating the crisis in the first place. (By say… letting them go bankrupt). Maybe he is waiting for the economy to recover before aggressively going after financial regulation, but until I see action, this was morally unacceptable. Even if economically sound.

And speaking of bad ideas, we come to my least favorite policy – the auto bailouts.

Summers called for a vote: who thought Obama should save Chrysler? The group was deadlocked. Four were in favor and four were against. Summers abstained, but he believed that Chrysler should get another chance at survival, especially since the Italian automaker Fiat had announced that it was willing to take over the company. Austan Goolsbee, who is both the staff director of the PERAB and one of Romer’s deputies at the C.E.A., cast the strongest of the no votes, arguing forcefully that saving Chrysler would damage the long-term prospects of G.M. and Ford, and for that reason Chrysler should be allowed to go bankrupt and be liquidated. Summers and Goolsbee had argued the issue for weeks, and the debate had become a source of friction between them.
At a morning meeting in the Oval Office on March 26th, Summers pressed Obama to make a decision. Romer told Obama of Goolsbee’s dissenting opinion, and he was brought into the meeting, which delayed the decision. “Half an hour to decide the fate of the auto industry?” Obama said, according to an account by Bloomberg News. “We need more time than this.” The group, plus several other advisers, reconvened at six o’clock in the evening. At one point, Robert Gibbs, the President’s press secretary and confidant, showed the group a map of Midwestern counties and their current levels of unemployment. He said, “We talk a lot about avoiding twenty-five-per-cent unemployment, like we had in the Great Depression, but in a lot of these places we’re already there.” When the debate was exhausted, Summers, perhaps recognizing that he had misbehaved at the morning meeting, faithfully summarized the views of everyone at the meeting, including Goolsbee. Obama asked Steven Rattner, the head of the auto task force, who had been one of the four to vote yes in Summers’s office, “What do you think the percentage likelihood is that, if we give this deal a chance, it will succeed?” Rattner didn’t make the decision any easier. “Fifty-one per cent,” he said. “But, Mr. President, in my experience, deals get worse, not better, over time.”
In the end, Obama sided with Summers over Goolsbee, but Goolsbee believes that his case against Chrysler did push Obama to impose the condition that, if the Fiat deal fell through, the government would offer no help. Over all, the episode suggests that there was enough internal dissension to make sure that the President’s options weren’t constrained. Goolsbee told me, “History has not been kind to Administrations where everybody agreed with each other and all they ever had to say was, Good idea, boss.”

It does my heart wonders to know that someone with the presidents ear was arguing my perspective with regards to the auto bailout generally, and Chrysler specifically. On this I think that Obama made a big mistake economically, because I think he made the decision politically to ’save jobs’. Given the time line progression, because so much had gone towards saving the banks, its my hunch that Obama felt he needed to do more for the ‘common man’ because he had already done so much for the banks already. Comparatively speaking the auto-bailout, and Chrysler in particular, were and are chump-change. But saving one industry, and another, but not this third is illogical, and bad policy.

No, i don’t think anything Obama has done is even close to ’socialism’. Rather, I fault him for the same thing that all government officials do in modern westernized countries. He has not allowed discipline to correct the market in anything: Housing, autos, banks, ect. I believe markets are most efficient at destroying inefficient and hubristic players. The ‘bitch-slap’ of the invisible hand is what makes a market work, take that away, and you have not capitalism, but corporatism. Where, ‘too big to fail’ depends on the size of your lobbing network.

Regardless, its nice to know that at least these thoughts are reaching the president’s ears. Here’s hoping they were right, and I was wrong…