If you haven’t already, do check out Ryan Lizza’s excellent New Yorker article on Larry Summers and the Obama Administration, which all the blogosphere has been talking about. A few points.
1. If you are going to do the “Summers at Harvard” leg of the narrative, please bring up the Shleifer Adventures in Russia, a deal that was probably more important in Summers leaving Harvard than him harassing Cornel West. That story is really skeezy (from the first link, “Some day [Harvard] doctoral students will compare and contrast its relationship with the Russian government in the 1990s to the University of Chicago’s relationship to Chile in the 1960s.” Well said.), and needs to part of the standard narrative of what Summers did at Harvard.
2. I think everyone need to consider the beginning of the Obama adminstration in the light of having to stop the bleeding on several key issues:
The urtext of economic policymaking in the Obama White House is a fifty-seven-page memo to the President, prepared in late November and early December of last year, by Summers and his deputy, Jason Furman. It has a five-page executive summary, and forty pages of comprehensive discussion about nearly every economic and budgetary issue that the new President would face in his first months in office—the stimulus, TARP, housing policy, the state of the automobile industry, the deficit, potential budget savings, regulatory reform….
The day after Geithner was confirmed, he had sat down in the Oval Office with Obama, Biden, and Summers. “We have to understand these five big things we’re stuck with that we inherited and that we’re going to have to solve and that are going to be very difficult,” he said. On his list were Fannie Mae and Freddie Mac, A.I.G., and—most important—the big banks that some feared were teetering on the edge of insolvency, specifically Bank of America and Citigroup. As Christina Romer had done in Chicago, Geithner warned that the problem was worse than the public understood, and would require more intervention than was popular.
I really look forward to the day when all this information is available in full for public reading. We often understand “The new person has to clean up for the old person” as a general idea, but here we have a half dozen incredibly urgent issues that the President has had to deal with. From losing the supply chain of the auto companies in a bad weekend to losing the entire financial sector in a bad weekend, Obama has had, and still does!, to deal with a nightmare compared to what most Presidents have had to deal with.
This leads to my absolute favorite quote of the current administration, from Austan Goolsbee to critics:
Look, we enter the government essentially in a hotel that is on fire. We’re throwing people from the windows into the pool to save their lives and this is the evaluation of the Olympic diving committee: Well, the splash was too big.
Here’s a good quote from the article:
The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As [Obama economic official Gene] Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)
Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.
The results of the stress tests showed that the banks were not in as dire shape as commonly believed. Most of the nineteen banks were able raise money privately. “It worked,” the Treasury official said. “People had money to put into banks. The nationalization crowd would have had the government putting all that money in.”
Before we dig in, let’s get a sense of bank sizes from the stress test:
I was very vocal for temporary bank nationalization then. I thought it could be pulled off if the assets of top banks, the ones who went through the stress test, were guaranteed, and we’d temporarily nationalize the 2 worst of the top 4 banks. I thought then the nightmare scenario, nightmarish enough that I don’t think I would have pulled a trigger, is that the government went to seize Citi and they fought it under the grounds the government had no legal authority, and we’d have a year of the stock market freaking out on court rulings while the actual status of Citi, and by proxy the banking sector as a whole, was entirely in legal limbo. Perhaps there were ways around this, but I didn’t see any proposed at the time (and as Yglesias points out, they didn’t seem to be looking too hard).
The bargain you had to make was that if you were to de facto guarantee the banking assets of the largest banks you’d have to push hard at the same time for legal authority to wind down any systematically big financial institution as well as push for tighter regulations on the fundamental characteristics of banks themselves. I didn’t see that as likely to happen at the time, and see it as less likely now, though I still hold out hope.
4. You should read it all, so I won’t blockquote any more sections. I found the repeal of Glass-Steagall coverage weak; I might agree that it didn’t add to the cause of the crisis, but in terms of having to deal with a crisis ongoing it’s made it significantly harder to close banks, or even approach the terms of doing so, when they are combined entities. To echo Volcker, we have a safety net on commercial banking for a reason, and allowing investment banking to access this safety net, often no questions asked, does double damage. And it makes the recovery period significantly harder to manage.