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Guest Post: Larry Summers Is Like a Guy Who Yells That the Sun Really DOES Revolve Around the Earth and that the Current Orbit is Just a Temporary Aberration . . . and That If We Just Wait a Little While, “Everything Will Return to Normal”

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Two leading White House economic advisors – Larry Summers and Christina Romer – are giving very different views on the economy.

As Fox news summarizes:

“Everybody agrees that the recession is over,” said Larry Summers, director of the National Economic Council.

“Of course not,” countered Council of Economic Advisers Chairwoman Christina Romer in a separate interview when asked if the recession is a thing of the past …

Romer appeared to be more politically sensitive to [the high unemployment rate], reflecting Obama’s recent statement that he won’t rest until all Americans who are looking for work can find jobs again.

Based on the “official definition,” the economy has, “at least in terms of GDP, reached that point” where the recession has ended, she said. But given high unemployment which could go even higher, Romer offered a different response when asked if the recession was over “in your mind.”…

Summers appeared to cite such forecasts in explaining the stages of economic recovery. He referenced the fact that unemployment dropped from 10.2 percent to 10 percent last month and predicted more solid trends toward recovery next year.

“Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be,” he said on ABC’s “This Week.” “These things happen in stages. First, GDP goes up. That has happened. Then, hours that are worked by workers who already have jobs go up. That’s starting to happen. Then employment goes up. We got very close to that this year, this month, with only 11,000 jobs lost. And then unemployment starts to come down. So these problems weren’t made in a month or a year, and they are going to take a substantial time to solve.

At first glance, Summers’ argument sounds convincing … GDP has been growing, and jobs lag the general economy.

However, as Paul Volcker explained to Spiegel this weekend, the growth in GDP is an illusion. Specifically, the economy is actually shrinking, and the only growth is from what the Fed has poured into the economy:

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

Moreover, Romer is right that unemployment might increase. Indeed, Summers has created a rising tide of unemployment in America which threatens to stall any lasting economic recovery for a while.

Indeed, many leading economists believe that America has permanently lost jobs under Summers’ watch.

Summers is out of touch with reality. He lost billions at Harvard due to his blindness about the riskiness of derivatives.

As I wrote in February:

Summers is the guy responsible for:

  • Repealing New Deal era legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming “too big to fail”

As a 1999 New York Times article entitled “Congress Passes Wide-Ranging Bill Easing Bank Laws” quotes Summers as saying:

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

As I pointed out in April:

On Friday, Summers basically said we should continue to do the exact same things which got us into this mess because:

All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.

Um . . . sorry to break it to you there Larry, but a group of economics professors has recently demolished the “self-equilibrating economy” theory:

If one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. …The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. …

The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena … This tradition, however, has been neglected …

And when economist James Galbraith spoke at a recent panel on the causes of the financial crisis, the first thing he listed as the main cause of the crisis was “The idea that capitalism … is inherently self-stabilizing” …

Summers [is] like a guy swearing that the Sun really does revolve around the Earth and that the current orbit is just a temporary aberration . . . and that if we just wait a little while, “everything will return to normal”.

As I pointed out in September, Summers has totally misunderstood the multiplier effect.

He must be replaced with someone whose allegiance is to America as a whole, and not solely Wall Street.

As Congressman DeFazio put it:

[Obama] is being failed by his ec[onomic team ... We may have to sacrifice just two more jobs [Summers and Geithner] to get millions back for Americans.

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23 comments

  1. Doc Holiday

    May we all rot in hell, if we fail to remember … stuff like this, then burn the witches … oh wait, do I have this backwards?

    Galileo’s championing of Copernicanism was controversial within his lifetime, when a large majority of philosophers and astronomers still subscribed (at least outwardly) to the geocentric view that the Earth is at the centre of the universe. After 1610, when he began publicly supporting the heliocentric view, which placed the Sun at the centre of the universe, he met with bitter opposition from some philosophers and clerics, and two of the latter eventually denounced him to the Roman Inquisition early in 1615.
    http://en.wikipedia.org/wiki/Galileo_Galilei

    Burn the witches!

  2. Anon

    “”We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago. It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.””

    http://baselinescenario.com/2009/04/27/larry-summers-new-model/#more-3466

    How does he say something like this without 100,000 people showing up outside his office the next day sharpening a guillotine?

  3. RW

    It’s nice spin that Obama is not being well served by his economic team, but I see little evidence for that. The big banks & wall street firms were his biggest contributors. He appears to anyone not invested in making excuses for him to be merely what his detractors claimed: a corrupt Chicago machine politician who was promoted well above his competence because of his politically useful racial background and skilled use of the teleprompter.

    In Chicago those who pay, play. Why is anyone surprised that he’s making his benefactors rich at our expense? What would Daley do? Blago? Jessie Jackson? These are his real role models. He’s acting as expected.

  4. bobh

    We ned a more sophisticated instrument for measuring intelligence that will put an end to the idea that Larry Summers is anything but a self-promoting mediocrity.

  5. Francois T

    Yet, Obama is not showing any hint of displeasure whatsoever with Summers.

    Guess he agrees with him. That doesn’t bode well for the rest of us.

  6. i on the ball patriot

    You all deserve to be fucked — hard — as long as you keep this two party fantasy theater alive with your votes and attention.

    No perception, no balls, no freedom.

    Deception is the strongest political force on the planet.

    1. Toby

      I’m with you iotbp! Except of course this is global, and applies to us all, no matter our nationality. We are obliged by virtue of the non-stop lies and bullshit, the paplable failure of the economic and cultural paradigm, the utter paucity of creative thinking in the mainstream, to turn off our TVs and let the politicians, corporations and all in their sway, talk to the hand. Direct your attention elsewhere. The chumps at the top are no longer worth our time.

      Switch off guys! Support the internet and stay skeptical.

      Deception is the strongest political force on the planet.

  7. nowhereman

    i on the ball patriot says:
    Deception is the strongest political force on the planet.
    Amen, brother!

    And this all happens at the most deceitful time of year, “The Greed Season” The biggest marketing scam ever created.
    “Guilt Consumerism” BRILLIANT!

  8. John

    Maybe Mr. Summers is joshing us with his “everybody agrees that the recession is over” line. You know, like he did back at Harvard when he was fooling around by saying that women are innately stupider in math and science than smart guys like him who know all about CDOs.

    Seriously, as a Tricked Progressive who voted for Obama (won’t be doing that again), his retaining Summers and Gang is about the most demoralizing thing I’ve ever seen. Obama judo-ed us with our own hope, and now we’re flat on our backs.

    One thing for sure: If you have any control over public education in your community, please do what you can to prevent the neighborhood kids from learning anything about economics. Just keep handing them cell phones and computer games. When they figure out what we have allowed to happen to their futures, the intergenerational war is going to turn nasty.

  9. ^WizeUp

    Obama doesnt have any concerns about corruption, deceit, ‘misplaced’ trust, or anything like that.

    He just wants the loan machine plugged back in.

  10. mike from Arlington

    How much of the TARP got doled out to Wall Street in the last admin compared to this one?

    In short order, much of the TARP money will be paid back from the banks, of which most was doled out from the last admin.

    Eventually, all of the bank TARP funds will be recooped from the banks in short order from this admin apart from maybe some AIG cash, again, most of which was dolled out in the last admin.

    Seems people forget these things…

  11. dh

    Re: “as a Tricked Progressive who voted for Obama (won’t be doing that again)” …

    Oh come on, you’ll fall for the re-invention of Palin and then eat it up, drink the kool-aid and go door-to door for her, then vote her in and be back here four years from today, saying you’ll never do that agin!

  12. fresno dan

    “Everybody agrees that the recession is over,” said Larry Summers, director of the National Economic Council.

    Owwww!!! I hurt myself laughing… I never knew the guy was such a comedian.

  13. Rickstersherpa

    So everyone here will be overjoyed when Sarah Palin is President, Lynn Cheney is reprising her Dad’s role as co-President/chief operating officer of the Government, Mitch My Heart is as large as pea McConnell is Senate majority leader, and Tan Boy John Boehner is Speaker with Larry Kudlow as Treasury Secretary? Yep, we will see real reform then. Social Security will be turned into a slush fund for Wall Street and Medicare a slush fund for health insurance companies. How soon we forget. As bad and bought and sold as the Democrats are, it can always be worse.

    Of course, sometimes I suspect that Larry Summers is a secret plant from Republican National Committee. And for a man who is supposedly so brilliant, he has been around at lot of freaking disasters, starting with that “ship pollution to poor countries memo” (which apparently the Europeans took seriously because that is exactly what they do with their landfill), through the Aisian Financial crisis, Glass-Stegall repeal, and that most blessed bill, Phil Gramm’s (the guy McCain wanted to make Secretary of the Treasury) Commodity Futures Modernization Act that permitted AIG to run its bucket shop.

    I am not saying this as an apology for Obama (Summers and Geithner’s appointments remain a terrible disappointment to me) and at some point, he will have to fire them if for no other reason than appease the base. On the otherhand, there have been good things going on. I work in Government and I can tell you that intelligence, belief in pubic service, and pragmatism have replace ideology and people who just hated their agencies they were running. Comparing him to the FDR’s administration, and the different circumstances he faces (FDR essentially had no opposition for almost 2 years as the Republicans were so reduced and demoralized and the Southern Conservatives were copted then as members of the Democratic Party, and not the heart of the opposition as they are today), he is no weaker than FDR in seeking to avoid direct fights with the powers that be. There is a learing curve in being President. Let’s see how well he learns.

  14. rickstersherpa

    Maybe Summers could take his own advice here.

    “In the US today, as in many other countries in the past, confidence will return the first day an official statement about the economy proves to have been too pessimistic.”

    From yves post of two years ago: http://www.nakedcapitalism.com/2007/11/larry-summers-warns-of-deepening-crisis.html

    Again, for the “brightest man alive” Summers apparently was oblivious the fact that all that credit had been lent on a housing and commercial real estate bubble and that what he thought was the basement was pretty close to the peak. But then the people talking housing bubble were not the seers of Wall Street but just folks like Dean Baker, Robert Schiller, and Calculated Risk. Individuals and sources that just don’t appear (or at least not to) on Summers radar screen. Although, to give him credit, the recession was on his screen. I also note how accurate those Fed forecasts turned out to be (NOT!!!). Makes one real confident about the current Fed forecasts.

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