Thursday, November 27, 2008

Obama does it the pragmatic way

Business Times - 28 Nov 2008

By recruiting Clinton era economists, he may be signalling that he does not plan to move towards a New New Deal

By LEON HADAR
WASHINGTON CORRESPONDENT

SOME pundits have been drawing parallels between the coming presidency of Democrat Barack Obama and that of Franklin Delano Roosevelt who was elected to four terms in office - serving from 1933 to 1945 - during one of the most tumultuous times in US history.

According to what could be described as the New New Deal Narrative, historians and journalists have noted that both Mr Obama and FDR were elected in the wake of a devastating financial crisis and during the ensuing economic recession. In this narrative, Mr Roosevelt's predecessor in office, Republican President Herbert Hoover and George W Bush, another Republican president and current White House occupant whom Mr Obama will replace next year, play the role of the antagonist in the respective historical dramas.

Both Mr Hoover and Mr Bush were strong adherents to free-market principles that reflected the pro-business orientation of their political parties - Mr Bush stressed his commitment to Reaganism while Mr Hoover had succeeded President Calvin Coolidge who reportedly stated: 'The business of America is business.'

Like Mr Hoover and his central bank, Mr Bush and his Federal Reserve have continued to stick to their economic laissez faire dogma and as a result, have failed to respond in an effective way to the financial crisis. Or so, at least, the storyline goes.

The New New Deal Narrative is based on the assumption that President Obama will be in a position to embrace the kind of and progressive economic policies which were adopted by FDR that used the power of an activist federal government to intervene in the American economy through huge spending on public programmes. Government-backed pension plans, unemployment insurance and public works were part of 'liberal' (or social-democratic) New Deal policies that not only placed a growing number of regulations on the private sector but also rejected the old Republican emphasis on fiscal prudence.

By applying the New Deal historical analogy to the current depressing economic reality, many liberal commentators are calling on Mr Obama to follow in the footsteps of FDR and to reverse what they see as policies driven by the archaic free-market economic philosophy that Mr Reagan and his successors have promoted - deregulating the economy; supporting free-trade; balancing the budget and advancing the interests of Wall Street.

Regulate the private sector

They would like to see Mr Obama and his economic advisers re-asserting the power of the government in regulating large segments of the private sector, including the financial markets; increasing spending - like there's no tomorrow - on a mix of old and new (public health, 'green' industries, rebuilding the infrastructure) federal programmes; and protecting American manufacturing through subsidies and tariffs while placing an emphasis on 'fair' and not 'free' when it comes to international trade.

And, yes, New Deal II also needs to ensure that all the 'villains' in Wall Street and their allies in Washington be put in their proper place - marginalised and eventually punished.

And who would one include on the list of these villains? How about renowned economist Lawrence Summers who served as Treasury secretary during the second term of the administration of Democratic President Bill Clinton? Recall that Mr Clinton, his first Treasury Secretary and once and future Wall Street investment banker Robert Rubin and then Fed chairman Alan Greenspan continued in pursuing a modified version of Reaganomics: deregulating the economy; balancing the budget; supporting free trade; advancing the interests of Wall Street.

In fact, it was the Clinton administration that decided to repeal provisions of the New Deal-era Glass-Steagall Act of 1933 that prohibited a bank holding company from owning other financial companies. It was the repeal of those provisions that enabled commercial lenders such as Citigroup, the largest US bank by assets, where Mr Rubin serves as director and senior counsellor, to underwrite and trade instruments such as mortgage-backed securities and collateralised debt obligations (CDOs) and establish so-called structured investment vehicles (SIVs) that bought those securities. In his role as Treasury secretary, Mr Summers, one of Mr Rubin's proteges, helped win the approval of the law that deregulated derivatives. In short, Mr Rubin and Mr Summers should be considered as the not-so-proud fathers the 'toxic' financial instruments that triggered the current financial meltdown.

Moreover, Mr Rubin, Mr Summers and Mr Greenspan resisted pressure from critics who have warned about the dangers posed by those toxic assets. And now enters another Rubiniac, Timothy Geithner, who worked under Mr Summers at the Treasury Department, and currently serves as president of the Federal Reserve Bank in New York. Mr Geithner has been trying to clean the financial mess through a series of bailouts, including that of the now troubled Citigroup, and has been receiving at best mixed reviews for his performance. In fact, some critics argue that Mr Geithner's opposition to bail out Lehman Brothers set in motion the financial crisis. Now it's probably not very surprising that the members of the Democratic Party's progressive wing and the proponents of the New New Deal Narrative are shocked that President-Elect Obama not only continues to receive economic advice from Mr Rubin, but has also chosen Mr Summers as his director of the National Economic Council and Mr Geithner as his Treasury Secretary. It's not only the role that these and other Rubiniacs have played in the financial crisis and - in the case of Mr Geithner, in doing not-such-a-great-job in containing it - that is bothering the critics. By recruiting so many of the economists who were basically pursuing the more user-friendly version of Reaganomics under Mr Clinton, Mr Obama may be signalling that he does not plan to move in the direction of a New New Deal, but to adopt a pragmatic approach to dealing with the financial crisis and the economic recession. In order to do that, Mr Obama seems to be willing to borrow from FDR as well as from Mr Reagan without committing his administration to any new grand economic doctrine a la New Deal. Pragmatism, and not ideological dogma, has always been the hallmark of both Democratic and Republican administrations going back to FDR.

Indeed, as Amity Shlaes points out in her book, The forgotten man: A new history of the Great Depression (Harpers Collins, 2007), contrary to many of the legends about New Deal, the 1929 market crash did not cause the depression. It's the reactions to that event that did it. Both Mr Hoover and Mr Roosevelt actually lengthened the Great Depression by following bad monetary policy, which further deflated the currency, and by raising tariff barriers, which broke up world trade and reduced economic activity everywhere.

Mr Hoover was not a dogmatic free marketer and was actually a proponent of government intervention in the economy. Mr Roosevelt's embrace of a more progressive agenda and a series of Keynesian policies involved a long process of trial and many errors, during which he and his aides tried to apply policy-based mish-mash to economic theories including socialism and fascism.

After succeeding in reducing unemployment, they ended up pushing the economy back into the depression in 1937 as a result of cuts to spending and an attempt to balance the budget. In fact, only the entry of the US into World War II and the militarisation of the American economy - and not the New Deal policies - helped bring an end to the Great Depression. Similarly, most of the presidents who had followed FDR in office have more often than not, pursued economic policies that ran contrary to the ideological tenets of their political parties. The liberal Democratic President John Kennedy proposed huge tax cuts while the pro-business Republican President Richard Nixon imposed wage and price controls and announced: 'We're all Keynesian now.'

The free marketeer Republican President Ronald Reagan increased the budget deficit to historic heights, and the budget was only balanced under the administration of Democrat Bill Clinton.

Finally, the push towards deregulation of the economy, including the financial markets, was supposedly one of the reasons for the current mess in Wall Street. It was supported by both Republican and Democratic presidents. And it would very difficult to imagine in what way a response by a Democratic president to the financial crisis would have been any different than the policies pursued by Mr Bush. That Mr Geithner, one of the leading players in the Wall Street bailout effort under Mr Bush, would be promoted to Treasury secretary under Mr Obama only demonstrates the non-ideological and ad hoc nature of the current and future attempts to contain the crisis.

Hence one should not be surprised if Mr Obama's Mr Geithner, not unlike Mr Bush's Mr Geithner, (bailing out this financial institution but not that one; trying to use the US$700 billion to buy toxic assets and then to inject capital into the financial system) would be muddling through the financial catastrophe. And that would involve the largest government spending programme (more bailouts; more economic stimulus packages; public works) in history that could total over US$4.3 trillion.

The hope is that this massive amount of spending would unfreeze the financial system, restart the flow of credit to business and consumers, reduce unemployment, resist protectionist pressures and prevent a cataclysmic depression.

That may not be a New New Deal, But if Mr Obama achieves that at the end of his first term, it would certainly be a very Big Deal.



Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

1 comment:

Toby said...

It won't work in reality, that's exactly what I consider.
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