The Siege Within

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The fifth anniversary of the Lehman Brothers bankruptcy is coming up next weekend. If nothing else, the avalanche of stories about it that are now in preparation should demonstrate that George W. Bush deserves credit for dealing with the financial crisis of September 2008 when it arrived in completely unexpected form

Yes, of course, Bush deserves plenty of blame for fomenting various problems during the first seven years of his presidency, but that is a more complicated story. When he showed up in the Rose Garden that September morn to ask Congress for TARP funds, it was because he had been briefed by two officials, Treasury Secretary Henry Paulson and Federal Reserve chair Ben Bernanke, who fully understood the gravity of the situation – that the global financial system was in the grips of a full-blown banking panic, and that only the Fed, as lender of last resort, with Congress four-square behind it, stood between the financial markets and a long-lasting global depression.

In contrast, presidential candidate Barack Obama didn’t choose Lawrence Summers to be his chief economic adviser until three days later.  And in the aftermath of the panic, Summers didn’t get it right. Under his tutelage Obama gave no clear explanation of what had happened on the eve of the election, offered no convincing narrative of events afterwards, failed in large measure to successfully manage expectations, and, even now, doesn‘t seem to really understand the sequence of events .

Instead it fell to economists Carmen Reinhart and Kenneth Rogoff, authors of This Time Is Different: Eight Centuries of Financial Folly to warn that, in the wake of a banking crisis, recovery would be much more painful and prolonged than in an ordinary recession. When the administration’s initial forecast of a peak unemployment rate of 8 percent turned out to far from the 10.1 percent mark it eventually reached, Summers framed it as the “Romer-Bernstein forecast,” after the subordinates who prepared it for him. The Obama administration made some very good calls in its first six months, and Larry Summers was in on some of them. The overall economic narrative that was created was not one of them.  Instead those first months produced a saga of bureaucratic infighting – and, of course, over Summers’s objections, the beginnings of a health care bill.

I mention this now, even before the next round of reinterpretation of the events of 2008 has properly begun, because the campaign Summer’s appointment to chairmanship of the Fed has reached feverish proportions.  It is based on a series of misapprehensions, Summers’s own and others.

For example, David Axelrod, Obama’s longtime political adviser, showed up last week to tell The New York Times and The Washington Post that Summers, as director of the National Economic Council, “was just a huge resource to the president at a time when it was desperately needed.  The president then and now, I believe, had a very high regard for Larry, and, because he saw it firsthand, I’m sure he has no doubt that Larry has the depth and intellectual acuity to handle the job.” Another former administration official, who declined to be identified, explained:  “It’s like the attachment you feel for your heart surgeon after he performs a quadruple bypass.”

But, starting next week, commentators and historians will give decidedly mixed reviews to that operation. The first press accounts of Obama’s economics policies  were frankly partisan toward one adviser or another – Ron Suskind’s Confidence Men: Wall Street, Washington, and the Education of a President, to budget director Peter Orszag, vs. Noam Scheiber’s The Escape Artists: How Obama’s Economic Team Fumbled the Recovery, to Summers. The next round of books, including one by former Treasury Secretary Timothy Geither, will add to our understanding. The outlines of the Clinton clique (as Ezra Klein, of the Post, has tagged them), or Rubinites, after their service to former Treasury Secretary Robert Rubin (as they were long known within the administration), will have become much clearer.

Obama is now dangerously weak.  He is under siege from within from two directions:  Summers’s many seconds in and around the White House want to see their principal at the Fed. And, on Syria, Secretary of State John Kerry has finally emerged, publicly, as the administration’s leading hawk.  In both cases, subordinates have put the president on the spot. He must make hard choices, soon.

Meanwhile, at the end of last week, Damian Paletta and Kristina Peterson of The Wall Street Journal reported that the White House probably could not expect Summers’s nomination to clear the Banking Committee to reach the Senate floor without several Republican votes. The Times editorialized against his nomination:  Senators should keep Mr. Obama from making a big mistake. You can sense the tide beginning to flow the other way. The reevaluation of Summers’s reputation has just begun.

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Ronald Coase, of the University of Chicago, died last week at 102. A founder of the “new” institutional economics, and the father of much of the best of deregulation, he was one of a handful of truly great economists of the second half of the twentieth century, along with Paul Samuelson, Simon Kuznets, Kenneth Arrow, and Milton Friedman. EP will have more to say about him in due course.