The prospect of seeing Larry Summers as chair of the Fed has angered many and makes me consider a move to somewhere stable, like, I don’t know, maybe Pakistan.
There are myriad reasons that I can instantly recite for reasons to disqualify Larry Summers but the most apparent are:
1. His support for the repeal of Glass-Steagall
2. His opposition to regulating derivatives
3. His notorious comment about women possibly lacking the ability for sophisticated mathematical reasoning
4. And last but not least, his protection of the big banks in his years as President Obama’s national economic adviser.
These alone are reasonable issues to raise for Summers being considered for the country’s most powerful economic position. But the most important charge has generally been overlooked: Summers played a major role in creating the economic imbalances that promulgated the housing bubble and explains the weakness of the U.S. economy right up to the present. This is the problem of the huge US trade deficit, which was in turn caused by the over-valued dollar.
To fully appreciate how bad it would be to have Larry Summers with Federal Reserve authority one would have to look back to the East Asian financial crisis in 1997, when Larry Summers helped lead the bailout of the countries of the region as part of the “Committee to Save the World“. Yeah, how’d that work out? The crisis at the time involved the fast growing Asians who were facing a run on their banks and their currencies.
One country after another found it necessary to dump their fixed exchange rate. Since a preponderance of their debt was denominated in dollars or other foreign currencies, many banks and major corporations were pushed to the edge of insolvency.
Summers and his Wall St. pals sought to exploit this unfortunate circumstance with the money and power of the IMF at their command. They formulated a bailout that gave countries the money they needed to get through the crisis, but required that they would pay their debts in full. The catch was that the United States would maintain an open door to exports from the region.
Unfortunately, it was not just East Asia that augmented its exports to the United States. The experience of the East Asian countries led developing countries throughout the world to begin to accumulate vast amount of dollar holdings to guarantee that they would never be in the same situation of the East Asian countries being forced to accept whatever terms the IMF handed down.
This led to a huge run-up in the value of the dollar, which in turn caused the U.S. trade deficit to sky-rocket. A high dollar makes imports cheap for people living in the United States, so we buy more imports from overseas. Conversely, a high dollar also makes U.S. exports more expensive to people living in other countries, which crippled our export business and sent American jobs to impoverished countries who could take advantage of workers’ rights—not to mention China.
A direct result of the Larry Summers high dollar policy was that the U.S. trade deficit blew up from a bit more than 1% of GDP in 1996 to 4% of GDP–comparable to approximately $640bn in today’s economy– in 2000. This ill-conceived policy caused the U.S. trade deficit to continue to rise for the next ten years, peaking at almost 6% of GDP–$960bn in today’s economy–in 2006.
The trade deficit also contributed to the huge gap in demand as a huge segment of the income generated in the United States was spent outside of the country. In the late 1990s this gap was filled by the demand inflated by the stock bubble. Record high stock prices led to a consumer consumption boom as people spent more, many times well beyond their means, based on their bubble-inflated stock wealth. It also led to a surge in investment as every idiotic internet start-up was able to raise hundreds of millions of dollars on Wall Street with little real hope of sustainable life.
And it was on his advice that President Clinton’s relied on that led to such grievous U.S. economic job-killers as NAFTA and the Commodities Futures Modernization Act of 2000 and allowed Phil Gramm to unleash yet another plague upon the U.S. economy (i.e., Savings & Loan Collapse, Repeal of Glass-Steagall, Enron Loophole and collapse, etc.).
Of course everyone knows that the bubble burst in 2000-2002, giving us the 2001 recession. Although the recession was officially somewhat short and mild, it is not easy to recover from a recession caused by the collapse of an asset bubble. We did not recover the jobs lost in the recession until February of 2005. At the time, this was the longest period without job growth since the Great Depression.
When the economy did finally start to create jobs again, it was on the back of the housing bubble. And we know where that got us.
Now that the housing bubble has burst, we are still left with a gap in demand from US trade deficit. Because the dollar has fallen over the past decade the gap is fortunately somewhat smaller, but it is still an unhealthy 4% of GDP or around $600bn a year.
Maybe the dollar will fall further in coming years, which could ultimately eliminate the trade deficit as a drain on demand. But this correction is not going to happen any time soon. In the meantime, we are left with very large budget deficits as a way back to growth and decent employment levels (much larger than we are now running) or with another bubble. That is, unless the forced austerity of the Republican sequestration and obstructionism doesn’t bring about Great Depression 2.0 first.
The budget deficit path does not seem politically realistic and the bubble method is not likely to end any better the third time than it did the last two times. That leaves us with a long-drawn-out period of high unemployment with tens of millions of people unemployed or underemployed which will ruin lives of workers and their children for decades.
That’s the world that Larry Summers brings to the table.
President Obama, I beg you not to repeat Bill Clinton’s mistake by listening to Larry Summers’ advice, much less letting this man ascend to the world’s most prominent and powerful economic position.
Harvey A. Gold