TIMOTHY NOAH FEBRUARY 29, 2012
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In his new book, The Escape Artists, my TNR colleague Noam Scheiber makes the interesting argument that one problem with President Obama's economic team was that, in struggling to pull the U.S. economy out of recession, the Rubinites (i.e., Tim Geithner and Larry Summers) were fighting the last war.
What the financial crises of the late 1990s taught Geithner, Summers, and other members of Treasury Secretary Robert Rubin's economic team, Scheiber argues, was to embrace the Powell doctrine. Just as Colin Powell had argued that the U.S. military should only fight wars where you can quickly defeat the enemy with "overwhelming force," so Rubin, Summers, and Geithner came to believe that the way you calmed tottering markets was with a massive infusion of cash into a troubled banking system coupled with the imposition on the country in question of strict market reforms. The latter could have devastating effects on that country's short-term economic well-being, but the overriding concern was to keep global markets from collapsing.
Scheiber uses the South Korea crisis of 1997 as an example. Rubin and Co. got the International Monetary Fund and the World Bank to commit to a $55 billion bailout. In return, the South Koreans had to raise interest rates to 25 percent to keep foreign capital coming in and break up their ludicrously inefficient conglomerates. The result was that South Korea's unemployment rate went from 2.5 percent to 7 percent. The upshot was that bankers got rescued and workers got screwed, but the bankers were all over the world and the workers were just in one country. "It was hard to argue with the results," Scheiber writes. "The world held together."
You see where this is going. In the 2008 banking crisis, Geithner and Summers applied the same strategy--Geithner, Scheiber writes, saw no great need for a stimulus bill once the banks had been rescued--with the result that unemployment became a secondary concern. (In this instance the needed market reforms involved the same banks that were being rescued, and were imposed not from without but from within. The result was the relatively mild Dodd-Frank financial reform bill.)
"The problem," Scheiber writes,
was that when you crossed out "Korean unemployment" and wrote in "U.S. unemployment" the difference between 6 or 8 or 10 percent wasn't chump change alongside the greater good of global financial peace. It could be the difference between whether your boss, the president, survived or was tossed out on his ear.
As things turned out, the Republicans ended up with a front-runner for the presidential nomination so weak that he almost lost a primary in the state where he grew up (and where his father was once governor). The GOP has overplayed its hand in Congress, and in general has been working overtime to frighten independents by taking extremist positions. In addition, recent indicators suggest the economy is finally limping back to life. So the smart money right now is on Obama's reelection. Still, Scheiber's point is a good one.
A larger question--one for another day--is why global markets find themselves on the verge of worldwide collapse with such alarming frequency. Er, that's not good, right?
13 comments
You asked: "why global markets find themselves on the verge of worldwide collapse with such alarming frequency" Generalized Answer: Government intervention in large market caused misaligned incentives, poorly understood risk, and institutionalized inefficiency, resulting in catastrophe . For South Korea in 1997: Gov approved and endorsed the Chaebols. Lots of institutionalized inefficiency, and Gov control. Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship. See below for parallel For US in 2008: GSEs continued to by sub-prime loans securities, driving demand for sub-prime and creating implicit Gov guarantee. Participants in mortgage market took advantage of situation caused by yet another Gov intervention with good intentions (to promote home ownership) gone awry
- mr_rationale
February 29, 2012 at 2:13pm
why global markets find themselves on the verge of worldwide collapse with such alarming frequency. Its because of the Democratic war on religion, that is why...don't ask me how but Rick Santorum told me so.
- blackton
February 29, 2012 at 2:24pm
I'm unsure about the definition of "global market". If this means a place that is too big to be observed entirely, a market demise could result from a collective lack of information.
- Doug12
February 29, 2012 at 2:55pm
Mr R of course gives the patent (wrong) answer based on the myth of Fannie and Freddie, but never mind. I can't speak to South Korea, but the recent crises were clearly created by deregulation of financial markets plus the creation of the Euro zone that enabled capital flows into dubious high risk markets, creating a global real estate bubble.
- timteeter
February 29, 2012 at 3:07pm
And the Rubinites didn't get it because their mentor, Robert Rubin, helped foster the deregulation in the first place.
- timteeter
February 29, 2012 at 3:08pm
Doesn't "Rubinites" sound like something out of the Book of Mormon (the one that Mormons belive to God's third testament, not the really funny musical)?
- wildboy
February 29, 2012 at 3:14pm
The Heritage simpleton seems to believe that markets would be friction-free and work perfectly in the absence of government intervention. I have some real estate in Persia that I want to fob off on her. Hilarious, blackton.
- liberalref
February 29, 2012 at 3:15pm
You can argue with Mr R all you want, but he will just (fail to) quote Wikipedia [or in this case one of an amazing number of plagiarizers] to you again. Though the life of the sentence beginning "Many economists believe" has been quite an interesting one, with or without the insertion of a clause about the Cato Institute. Wikipedia: http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
- mldarby
February 29, 2012 at 3:27pm
Markets wouldn't be affected by cartels or meddling by capitalistas right? Or "creative destruction," or massive profit-taking which bankrupts the middle class and poor, thus collapsing demand; this would never ever happen in a free market system! Also, bankers, investors, Captains of Industry and Job Creators never make dumb decisions, bad investments, or engage in criminal activities that harm the markets. This couldn't possibly happen. Personally I think the 2008 crisis was all Obama's fault.
- Sophia
February 29, 2012 at 3:52pm
This is a great post. Of course the broader economic consensus in the Administration did eventually support the use of stimulus measures, though not to a sufficient degree to prevent high unemployment as we all know now. Chait at his new blog at NY Mag theorized that part of what led people like Summers to downplay a larger stimulus (as advocated by Romer and others) was that they internalized the political calculus of people like Ben Nelson and accepted arbitrary limits like "$800 billion." That seemed a bit simple to me but Noah's "fighting the last war" theory ties it all together well, this dangerous economic hubris lives on.
- Pnaut
February 29, 2012 at 4:02pm
Blackton Laughter.
- Nusholtz
February 29, 2012 at 7:13pm
I have to agree with the Rat The lower capital gains and dividends tax was a destructive attempt by government to manipulate stock prices. Free markets require that discriminatory taxation of passive stock ownership income be eliminated.
- Nusholtz
February 29, 2012 at 7:16pm
I cannot be too critical of Summers and Geithner because I was opposed to the government takeover of the banks (what would we do on the second day?) and held the belief that Keynes was about jump starting an economy stuck in a high unemployment, low output equilibrium (the equilibrium seemed to have been displaced). My objection was with Obama's initial decision to stick with the same economic advisors he had picked before the financial collapse, when he should have been running around with his hair on fire and picking advisors for the crisis that he would face not the smooth sailing that appeared to be the case when he picked Summers and Geithner. Obama did not run for office as a crisis president, he has not governed as a crisis president, and his advisors have not advised a crisis president. We got what he offered.
- rayward
February 29, 2012 at 7:18pm