"The High Priests of the Bubble Economy"

Dean Baker goes full bore after two deserving targets, Bob Rubin and Larry Summers, at TPM Cafe. Key excerpts:

Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.

It is important to separate Clinton-era mythology from the real economic record. In the mythology, Clinton’s decision to raise taxes and cut spending led to an investment boom. This boom led to a surge in productivity growth. Soaring productivity growth led to the low unemployment of the late 1990s and wage gains for workers at all points along the wage distribution.

At the end of the administration, there was a huge surplus, and we set target dates for paying off the national debt. The moral of the myth is that all good things came from deficit reduction.

The reality was quite different. There was nothing resembling an investment boom until the dot-com bubble at the end of the decade funnelled vast sums of capital into crazy internet schemes. There was a surge in productivity growth beginning in 1995, but this preceded any substantial upturn in investment. Clinton had the good fortune to be sitting in the White House at the point where the economy finally enjoyed the long-predicted dividend from the information technology revolution.

Rather than investment driving growth during the Clinton boom, the main source of demand growth was consumption…

The other key part of the story is the high dollar policy initiated by Rubin when he took over as Treasury secretary…

A lowered dollar value will reduce the trade deficit, by making US exports cheaper to foreigners and imports more expensive for people living in the US. The falling dollar and lower trade deficit is supposed to be one of the main dividends of deficit reduction. In fact, the lower dollar and lower trade deficit were often touted by economists as the primary benefit of deficit reduction until they decided to change their story to fit the Clinton mythology.

The high dollar of the late 1990s reversed this logic. The dollar was pushed upward by a combination of Treasury cheerleading, worldwide financial instability beginning with the East Asian financial crisis and the irrational exuberance propelling the stock bubble, which also infected foreign investors.

In the short-run, the over-valued dollar led to cheap imports and lower inflation. It incidentally all also led to the loss of millions of manufacturing jobs, putting downward pressure on the wages of non-college educated workers.

Like the stock bubble, the high dollar is also unsustainable as a long-run policy. It led to a large and growing trade deficit. This deficit eventually forced a decline in the value of the dollar, although the process has been temporarily reversed by the current financial crisis.

Rather than handing George Bush a booming economy, Clinton handed over an economy that was propelled by an unsustainable stock bubble and distorted by a hugely over-valued dollar…

While the Bush administration must take responsibility for the current crisis (they have been in power the last eight years), the stage was set during the Clinton years. The Clinton team set the economy on the path of one-sided financial deregulation and bubble driven growth that brought us where we are today. (The deregulation was one-sided, because they did not take away the “too big to fail” security blanket of the Wall Street big boys.)

For this reason, it was very discouraging to see top Clinton administration officials standing centre stage at Obama’s meeting on the economy. This is not change, and certainly not policies that we can believe in.

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  1. Anonymous

    I agree that Summers and Rubin do not represent change. Also, you could keep going back through every president and attribute some of today’s problems to each. Reagan and his deficit spending, Nixon’s repeal of the gold standard, etc.

  2. Anonymous

    Why are the comments on this blog so informative, while those on Calculated Risk and Global Economic Trend Analysis so inane? People posting “first!” (because they are the first post) or using idiotic nicknames…

  3. Anonymous

    Isn’t Paul Krugman one of the chief proponents of this Clinton mythology? Raising taxes, balancing the budget, job growth, etc. (don’t look at that stock bubble or credit bubble) were all good during Clinton.

    Perhaps he and Dean Baker need to hash this argument out a little further.

    On the plus side, at least Alan Greenspan, Phil Gramm and Art Laffer aren’t on Obama’s economic advisory team.

  4. Anonymous

    “O” may be the last president of the US as this economy collapses under the weight of deceit. He has a chance to stop the outcome but looking at his handlers I’m not optimistic.

  5. Matt Dubuque

    I agree. As I previously stated here, I hope Summers is not chosen.

    He is a jihadi for free markets and worship the invisible hand.


  6. Anonymous

    FWIW – the man sitting on Obama’s right at his economic summit was this guy named Paul Volcker. People tossing the Rubin/Summers appointment around are just filling editorial space.

  7. S

    Everyone says Volker is the answer? Why? Perhaps Whitehead has iright: there is no fix.

    Amen to Rubin and Summers. Rubin is only an advisor as everyone knows he is toxic. The astrounding thing is they Dems go back to the same dirty well.

    so volker comes in raiose rates and accelerates the bankruptcy of the US. or he devlaues the dollar casts off the old busines model of debt export and then what? what exactly dioes the US do then when they serve up their auctions and no one shows up? The only thing left for the US to do is to pretend the model works (kind of like GM) convince the world that we are a safe haven (military keynesianism) and print. Rinse wash repeat.

    This ends badly no matter who Obama picks. Stockholm syndrome is a bitch.

  8. S

    MS thre in the towel yesterday and hired a retail bank exec to grow their bsuiness (Wachovia of all places).

    So, when the US has to find alternative funding sources, where exactly is it going to go. The banks are looking toward deposits. The US on the other hand will raise taxes in a fashion that will administer a slit to the throat of an already wounded and bleeding economy. Then they may even impose capital controls. The UBS indictment is a tell here. There is a real reason, despite the tin hat and whacko crowd, that gun sales and safe sales are hitting records.

  9. Anonymous

    While both Baker and Summers are “Democrats”, they are very different. Baker is a true liberal and the most forceful, persuasive, and well-informed proponent of liberal ideology and liberal policies in matters economic and (by extension) social. I do not agree with everything he says, but I respect him.
    Summers, on the other hand, is what? A hired hand? More to the point, I am not sure now whether Summers is an idiot savant or just an idiot. (A Harvard Professor an idiot? Absurd!) He is consistent in that he takes an idea that has (or may appear to have) some validity and pursues it to the extreme until it becomes a recipe for disaster. His success may be explained by his energy and his willingness to forcefully sell to the economically illiterate asinine ideas that benefit the economically privileged.

  10. Anonymous

    Any macroeconomic analysis of the last 2 decades that ignores the presence of emerging markets lacks credibility. Cheap money continued to flow upward to enterprising economies of the developed countries, yet the innovative and enterprising investments expected were never given the capitals. In their places were massive greed, profit, short-term driven mis-allocation of funds into made-in-USA fraudulent financial instruments that are the cancerous parts of this global financial crisis. Imbalances were welcomed and perpetuated by all willing parties (developed and developing economies) and were the fuels for growth. The collapse now is the result of the biggest-ever mis-allocation of capitals perpetrated by the greedy intermediaries of Wall Street, fostered by the ideological bent of free market fundamentalism by the regulatory authority.

  11. cent21

    CR doesn’t have any captcha or other mechanism to discourage idiocy in the comments.

    Sort of like what happens when you over-do deregulation. There are plenty of good comments on CR posts, but they get lost in the noise, and eventually damp out.

    I think Dean is going a little overboard on po-pooing the Clinton years with the primary focus on who will drive the Obama economy. While I concur that all was not roses during the Clinton years, you have to remember that congress drove a lot of the details.

    One not mentioned that I think was over-done; eliminating capital gains taxes on home sales, which certainly added a positive feedback component to shifting the bubble to housing as well as setting the agenda for further tax cutting.

    I think we’ve had a shift of about 50% of GDP now in the federal debt, counting just the public debt plus the SS trust bonds accrued. Certainly more than that including the $Trillion or so that the FED balance sheet has ballooned to cover the finance sector’s follies.

    But I might ask Krugman if everything about what Summers and Rubin did was folly in terms of progressive compatible values. The dollar strengthen during the Clinton years in large part due to the declining federal debt. Low interest rates are generally considered a plus.

    Perhaps enough to say that Dean wouldn’t have written this now unless he was lobbying for someone other than Summers as Sec Treas.

    A reasonable enough thing for Dean to prefer. But I’d like to ask who else he would recommend who can command some level of confidence, as stabilizing the economy is going to require a whole lot of confidence building, in addition to whatever actual government action is most beneficial for the short and long term.

  12. Byrd

    S: Attributing basic Fed Policy actions to Paul Volcker as being his only redeeming qualities is grossly nearsighted at best.

    Solving this problem will undoubtedly require a massive reworking of the system and out of the box thinking. Paul is one of the few political economists that actually spoke out years before about this train wreck. He warned us about it and hence has far more creditibility than any other public figure i know.

    He will be instrumental in getting honest talk and practial solutions to the table and implemented if given the chance.

  13. Bruce Sims

    Per Michael Hudson, economic historian “Every financial crisis in the last three hundreds years is been triggered by a fraud or a scam. There is always a break in the chain of payments…. in practice fraud is what has brought down almost every single expansion, every bank take over, the saving and loan crisis in the 1980’s, the stock market crisis in the 1920’s…”
    THIS is what needs to be pursued and prosecuted with long term prison sentences.
    Why is it ‘accountability’ is always for the ‘working class’ and never for those ‘running things’?

  14. djap113

    for anyone who believed that HOPE and CHANGE were anything more than rhetoric for the masses, i’ve got some property just north of baghdad for sale. CHEAP!

  15. S

    Whitehead doesn;t think there is a solution. Volker may be smart and prescient and all the other plaudits (as were other people who were a hell of a lot more eloquent in seeing the problem morph and screaming blody hell about)but as far as I know the law of gravity has not been reveresed. It is the collective Washington Eestablishment that is unwilling to be downgraded, which means they will claw to past glory and calls of the world needs the US to lead, leaving Volker a palliative measure but not a solution.

  16. Anonymous

    My vote is for Paul Volker for the Treasury… Summers and Rubin are a couple of pampered yuppie, yes men.

    Bankruptcy Court will make an excellent clearing house for distressed assets. Let’s get real here…!

    Best regards,


  17. doc holiday

    No one, anywhere should be happy with Obama and his falsified promise of change. It is sad that he is thought to be such a great speaker — but now, it’s fairly obvious, he is not a great speaker! Lincoln would be ashamed of him for morphing into a crook so quickly!

    I’m very disgusted with his rhetoric and I hope people send a clear message to him that he is already way off track, and no where close to being ready for the challenges ahead, and IMHO, he needs a wake up call and continued reminders that he represents America, not lobby groups and well-connected political social climbers.

    Obama’s BS is very reminiscent of The Democrat election two years ago, where change was in the air — then the newly elected members did absolutely nothing and made matters even worse. It looks as if America has been hoodwinked again and we wiill have four more years of either stupidity or corruption. This is so disheartening to watch our country decay!

  18. luther

    :: stuff to know about Mr.O ::

    -> he just announced his internet transition team, both of which worked on his campaign internet team. why does he need an internet transition team do you ask? maybe to survey (and shape) the blogosphere?

    if so, then i would suggest that anyone who has a strong opinion for/against a certain candidate for SecT to take a jaunt over to where his customer base is hanging out (huffpost, kos, demounderground, etc) and make a comment with a link or 2 supporting your argument.

    you don't even need to stick around, intelligent comments are in shorter supply over there and tend to stick out and open ears & eyes.
    (just be careful how harsh you criticize the maestro himself or risk an obamabot backlash.)

    –> his 1st and only press conference so far came 1 day after his 1st intelligence briefing and 1 hour after his economic powwow where he learned many things he never *really* knew before (and that none of us *really* know either). maybe the stuttering came from the gravity of the situation really beginning to sink in?

    –> consider his poker game:

    i'm not saying that there may not be a fine reason to criticize him come soon, but let the man play his cards for chrissakes.

    if you wanna get in the game, get in the game. heck, you may already be in the game for all you know.

  19. Anonymous

    Has anyone noticed that Obama’s speech pattern has changed. During the campaign he was deliberate and forceful, although he was saying nothing. What politician has not said they would cut taxes or do something about health care. He was working from a script and his delivery was impeccable.

    Now notice when he talks, he hesitates. Almost every sentence begins with a deep resonating aaaaaaaahhhh. He is hesitating because he is not yet well versed in the new concepts he is being fed. He showed that he doesn’t know what he is talking about when he stated his first priority was another stimulus package. The last one lasted about one month before the retailers started heading south. It adds to the national debt, but provides a fleeting benefit to the economy. His honeymoon with the American people will be the shortest in history as it becomes obvious that he really doesn’t have a clue.

  20. Anonymous

    I fear that four years of Obama is not going to be "Change you want." Obama is a very indecisive person. He rarely makes a decision on his own, usually allowing others to make decisions for him. Once they make the decision, he's able to throw them under the bus if the decision doesn't work out and move on to the next advisor. On top of that, Obama was basically put forward as a puppet of the Democratic Party. That's why Pelosi, Dean, Kennedy, Kerry and the others so forcefully promoted him over Hillary Clinton. Obama will do what they want. Hillary wouldn't have been such a pushover.

    So, bottom line, we'll get 4 years of mushy "Hope & Change" and then we can move on to something else.

  21. Anonymous

    Where the hell did the neo-cons come from ? Always lurking, listening to Rush and Bill on their head phones.

  22. Anonymous

    doc holiday said… well, all kinds of unkind things…

    Doc, I am glad you are at least unbiased and very happy you can foresee the future!

    Seriously, our system does not give us a lot of choices. I think we got the better of the two alternatives and far better than we have had for eight years.

  23. groucho

    “Everyone says Volker is the answer? Why? Perhaps Whitehead has iright: there is no fix.”

    As hanky panky has clearly demonstrated there is a fix.

    The “fix is in”, quickly building lifeboats for connected hi-fi before the titanic(taxpayer) sinks beneath the waves.

    Too many look at Volker as an honest player. History does NOT support this view. Many of the moral hazard and TOO BIG TO FAIL entities are his children from the LAT-AM fiasco. After becoming lucrative conduits to pump recycled petro-dollars into dubious NY banks were allowed, under Volker, to hide losses for years when said scam investing blew up as is the usual course of events.

    (Smaller version of the asian contagion and current subprime’s sublime fiasco)

  24. Anonymous

    Can’t quite figure out why so many people think Paul Volcker would “volunteer” for the job ? He’d be crazy at his age to do anything other than informal advising….Let the good man rest on his laurels, nudge the right people in the right direction once in a while, for all it is worth, and go fly-fishing. He has earned his retirement.

    My five cents worth.

  25. Alfred

    It is idiotic to blame the Clinton administration for what is happening in the economy today. The Bush administration faced Hobson’s choice at the beginning of their term. They chose to go down the wrong path. Fighting two wars and at the same time lowering taxes for corporate fat cats and then hoping that fortunes will surely trickle down is not the right way to go. Instead of recognizing that the productivity boom had reached a peak in 2000, and righting the economic ship with a proper workout of the 2001 recession, proper interest rates and sensible tax and fiscal policies, they opted to ignore the writing on the wall, because deficits don’t matter. They choose to fight a war and to pursue their own oil-dominated foreign agenda and sacrificed the fortunes of the rest of us. To have the nerve and try to shift the blame to the Clinton administration demands institutionalization of the author. We shall not let them get off that easy by shifting the blame to past administrations or by thinking that the Bush administration did all this in good faith and nobody could have foreseen it, or that authorities were just too stupid and incompetent. This administration knew what they were doing and they choose to sacrifice everything for their oil-dominated foreign policy agenda.

  26. Doug

    Blurb from the article on Iceland :

    “Enormous mistakes were made, but those who made them are still in the same place,” said Hildigunnur Runarsdottir, a music composer who has attended five protests since the country’s banking system collapsed last month. “They don’t seem to be doing anything at all about the situation.”

    sound familiar??

    The only prescriptions that make any sense are the ones Ron Paul espouses. Gold Standard, eliminate the Federal Reserve Interest Rate setting policy (which I could write in about 20 lines of perl, which would accept input variables such as $FDG (fudge factor), $CLINK (go the glasses), $BOOMBOOMBOOM (from the drum band outside my window), $DIRG (swan song for whomever got fired today).

    Anyone suggesting measures such as those?? NOPE. That would be considered “too draconian”. Anyone saying such would be deemed a lunatic and frog marched out of the proceedings (at which point Pelosi sneaks out of the meeting to deliver a “partisan rant” just to keep things pugnacious enough to insure good results).

    I stand with Whitfield. and Whitehouse too.


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