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January 31, 2010

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Volcker: How to Reform the Financial System

Posted: 31 Jan 2010 12:33 AM PST

Paul Volcker summarizes his ideas for reforming the financial system:

How to Reform Our Financial System, by Paul Volcker, Commentary, NY Times: President Obama 10 days ago set out one important element in the needed structural reform of the financial system. No one can reasonably contest the need for such reform...
A large concern is the residue of moral hazard from the extensive and successful efforts ... to rescue large failing ... financial institutions. ... The phrase "too big to fail" has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.
As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. ... That is why Adam Smith ... advocated keeping banks small. Then an individual failure would not be so destructive for the economy. That approach does not really seem feasible in today's world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.
Instead,... the ... implied moral hazard has been balanced by close regulation and supervision. Improved capital requirements and leverage restrictions are now also under consideration ... as a key element of reform.
The further proposal ... to limit the proprietary activities of banks approaches the problem from a complementary direction. ... The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading... Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five. ...
Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest with customer relationships, conflicts that simply cannot be escaped by ... walls between different divisions of an institution. The further point is that the three activities at issue ... are in no way dependent on commercial banks' ownership. ...
There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority ... to limit their capital and leverage would be important... To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals ... point to the need for a new "resolution authority." ... To put it simply, in no sense would these capital market institutions be deemed "too big to fail." ...
I am well aware that there are interested parties that long to return to "business as usual," even while retaining the comfort of remaining within the confines of the official safety net. ...
I've been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to "lay off" tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.
The implication is clear. We need to face up to needed structural changes, and place them into law. ...

links for 2010-01-30

Posted: 30 Jan 2010 11:01 PM PST

"Hearts and Minds"

Posted: 30 Jan 2010 01:36 PM PST

Robert Shiller says pessimism is leading to a pessimistic outlook for economic recovery:

Stuck in Neutral? Reset the Mood, by Robert Shiller, Commentary, NY Times: The United States and other advanced economies may be facing a long, slow period of disappointing growth.
That is a widespread concern, as recent polls demonstrate. A USA Today/Gallup poll ... found ... that about two-thirds of Americans say they think that economic recovery won't start for two more years, while 28 percent say it won't begin for at least five years.
Among students of history, there are fears that we will suffer the type of chronic economic malaise that afflicted the world after the 1929 stock market crash, or that weakened Japan after the puncturing of twin stock and housing market bubbles around 1990. ...
The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone's behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring. ...
The present mood ... needs to be put into a longer historical context. After World War II, there was rapid growth in labor productivity until sometime around the early 1970s. But then there was a major break, roughly coinciding with three events of 1973-74: the oil crisis, a huge stock market tumble and the first significant depression scare since the Great Depression itself.
According to the Bureau of Labor Statistics, annual growth of business output per labor hour averaged 3.2 percent from 1948 to 1973, but only 1.9 percent from 1973 to 2008.
Ever since the long-term productivity slowdown became visible, the economist Samuel Bowles, now at the Santa Fe Institute, has said that its causes are to be found as much in the loss of "hearts and minds" of workers and investors as in technology.
This month at Yale, in lectures titled "Machiavelli's Mistake," he spoke of the error of thinking that a high-performance economy could be based on self-interest alone. And he warned of the overuse of incentives that appeal to individual gain.
The speculative boom periods that ended a few years ago carried us into such overuse, and today's malaise is partly a result of our disorientation from that period.
In their coming book,... George Akerlof ... and Rachel Kranton ... argue that an economy works well when people personally identify with it, so that their self-esteem is tied up with its activities. ... [A] relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery.
Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors — problems that may otherwise persist for many years.

I don't know if "problems in the hearts and minds of workers and investors" -- workers in particular -- is the "heart" of the slow recovery problem. I always find Shiller's psychology-based explanations less than fully convincing, but listen anyway because he has a pretty good track record at predicting emerging bubbles. But I will say this. Aggressive, effective job creation policy by the government -- putting people to work -- would go a long way toward repairing any problems in the hearts and minds of workers.

As for investors, their hearts and minds would be best repaired through strong regulatory measures that prevent the type of behavior that got us into this mess, or that substantially reduce the consequences when hearts and minds work together to cause this to happen again despite our efforts to prevent it.

Did Obama Change the Conversation?

Posted: 30 Jan 2010 10:35 AM PST

I think it's too soon to be talking about deficit reduction given the state of the economy, and particularly the state of labor markets, but there's no reason to let the people who do want to talk about it dominate the conversation.

We do need a plan to bring the deficit down in the long-run, but right now we need more, not less deficit spending, and there are job creation proposals currently under consideration by Congress that rely upon the ability to increase the deficit in the short-run (e.g. see here for Dean Baker's negative reaction to one recent proposal from the administration).

If we could talk about the long-run deficit problem without making it less likely that we will enact further job creation measures now, there would be no problem with the deficit discussions. But that's not the case. Even though the long-run problem -- health care costs -- is largely independent of short-run stimulus measures, i.e. the short-run stimulus measures contribute very little to the long-run problem, all of the discussion about the long-run problem make it much less likely that Congress will use deficit spending in an attempt to create jobs. People are confused about the nature of the problem, and Republicans opposed to more stimulus (or just saying no for political reasons) have no incentive at all to clear up the confusion.

So we really ought to be talking about short-run measures to increase deficit spending and create jobs, but Republicans have been successful at turning the conversation to the long-run, and the administration has played right into this strategy.

Stan Collender takes a look at recent Republican strategy on the long-run deficit issue:

GOP Doesn't Do Fiscal Responsibility, by Stan Collender: The following all happened just this week:
Item 1.  The Conrad-Gregg commission, which needed 60 votes in the Senate, was defeated 53-46.  The amendment creating the commission would have been adopted 60-39 if all of the GOP senators who co-sponsored the amendment voted for it.  Instead, seven of the Republican co-sponsors withdrew their co-sponsorship the week before the vote and then voted against it.
Item 2. All Senate Republicans voted against re-establishing the pay-as-you go rules, which would have required that, with certain exceptions, any new mandatory spending or revenue legislation not increase the deficit.  The rules were adopted with only Democratic support.
Item 3.  With the Conrad-Gregg commission killed, congressional Republicans have been heavily critical of the commission the Obama administration may create by presidential order to consider ways to reduce the deficit.  There are growing indications that the GOP House and Senate leadership, each of which would get to appoint three of their own members to the commission, may refuse to name any in the hope that the panel's deliberations will be stopped dead in its tracks without them or that the Democrats will proceed on their own. The stated reason for the GOP opposition is that there's no guarantee that a presidential commission's recommendations will be taken up by Congress even though there's even less of a chance if it's not created.
Item 4.  Republican Chairman Michael Steele is saying so often that Republicans are against cuts in Medicare that it's starting to sound like a mantra.  Add to that their stated opposition to revenue increases (see #1 above), military spending reductions, homeland security reductions, and the extremely low possibility that, if Medicare is too hot to handle, they'll go anywhere near Social Security, and the deficit reduction math becomes totally impossible.
What's most infuriating about this is that the GOP is even blocking what used to be the easiest thing for everyone to agree to do -- budget process changes.  In fact, the saying among budget aficionados in Washington used to be that when Congress couldn't or wouldn't do anything about the budget, it did something about the budget process.  Now, however, because of GOP opposition, even budget process changes that wouldn't impose any immediate changes in spending or revenues, are becoming, or have already become, impossible to adopt.

You can't get people all worked up about the deficit, and then block every attempt to deal with it, especially when your party has been behind some of those proposals in the past. Or so you would think. However, up until Obama met with Republicans yesterday, I would have expected the strategy behind the Republican opposition that Stan Collender describes to work no matter how transparent it is. It always worked before. But in listening to people talk about Obama's meeting with the Republicans, I am beginning to think that his appearance, and particularly his rebuttal, was more notable than people realize -- that Obama began to change the conversation in a way that identifies and portrays Republicans as the obstructionists they are. Am I nuts to think that?

Update: Brad DeLong:

Can Someone Please Tell Me How This Is Supposed to Be Good Policy?: There is about a 30% chance that the U.S. economy is about to start growing rapidly, with unemployment declining by a percentage point or two each year. There is about a 40% chance that we are about to start a recovery like or a little bit better than the "jobless recoveries" that have followed the last two (much shallower) recessions, with unemployment staying where it is or trending down slowly. And there is about a 30% chance that the unemployment rate is going to pause--and then start rising again in a double-dip recession.

The tools to fight a further rise in unemployment are threefold:

  • Banking policy--have the Treasury buy or guarantee risky financial assets in enormous amounts in order to boost asset prices and get businesses back into a position where they can profitably obtain financing for expansion.

  • Monetary policy--have the Federal Reserve goose asset prices by taking steps that lower real interest rates somewhere along the yield curve.

  • Fiscal policy--have the government spend money, either by hiring people directly or by buying things from private companies that then hire people directly.

The populist anger and fallout from the last set of banking policy interventions has taken the first of these off the table.

The current complexion of the Federal Open Market Committee has taken the second of these off the table.

And now Barack Obama is taking the third of these off the table.

Will someone please tell me how this is supposed to be good policy? ...

January 30, 2010

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links for 2010-01-29

Posted: 29 Jan 2010 11:02 PM PST

''Wage and Benefit Growth Hits Historic Low''

Posted: 29 Jan 2010 02:44 PM PST

To state the obvious, this has not been a good year for labor:

Wage and Benefit Growth Hits Historic Low, Wall Street Journal: Wage and benefit costs, both before and after adjusting for inflation, grew more slowly in 2009 than in any year since the U.S. government began tracking data in 1982, as double-digit unemployment weakened workers' ability to command higher pay.
In the past 12 months, the cost of wages and benefits received by workers other than those employed by the federal government rose 1.5%, according to the Labor Department's employment cost index. In the same period, consumer prices rose 2.7%.
Adjusted for inflation, wages and benefits fell 1.3%... The inflation-adjusted cost of wages and benefits at the end of 2009 stood just 1.1% higher than at the end of the previous recession in 2001, the Labor Department said.
The Employment Cost Index measures the cost of labor independent of the influence of changes in compensation caused when high-wage sectors grow more or less rapidly than low-wage sectors. Unlike widely cited data on wages, the index includes the cost of benefits, which account for about 30% of total compensation costs. ...
Private employers' health-insurance costs rose 4.4% in 2009, after increasing 3.5% the year before. The 2009 increase, though, was the second-lowest rate of increase in more than a decade, according to the survey. The Labor Department noted that this reflects, in part, employers' reducing their contributions to employees' health insurance or switching to lower-cost health plans. ...

GDP Growth Grows at an Estimated 5.7% Annual Rate in the Fourth Quarter of 2009

Posted: 29 Jan 2010 11:35 AM PST

US GDP grew at a 5.7% annual rate in the 4th quarter of 2009:

US GDP growth fastest in six years, by Alan Rappeport, FT: The US economy grew at the fastest rate in six years during the fourth quarter, offering hope that the recovery is gaining sustainable momentum, official figures showed on Friday.
US gross domestic product grew at an adjusted annual rate of 5.7 per cent in the last quarter of 2009, the commerce department said, a sharp acceleration from the 2.2 per cent increase in the prior quarter. ...
Christina Romer, who heads President Barack Obama's Council of Economic Advisers, called the report "a welcome piece of encouraging news", but warned that there would be bumps ahead on the road to recovery. ...
What's the main reason for the growth spurt?
Inventory liquidation slowed substantially during the quarter, as private businesses shed $33.5bn compared with $139.2bn in the third quarter. That added 3.39 percentage points to overall output.
Consumer spending, which typically accounts for about 70 per cent of economic activity, grew by a less-than-expected 2 per cent... GDP was boosted by a rise in non-residential fixed investment, which increased by 2.9 per cent after having fallen by 5.9 per cent in the third quarter.
Analysts were encouraged by the fact that growth advanced so quickly in spite of a slim 0.1 per cent increase in government spending. ...
The pace of growth is expected to slow in the coming quarters, however, as the build-up in inventories moderates and the impact of government stimulus measures fades. ...
This report will give deficit and inflation hawks ammunition:
..."The hawks are starting to get a little more back into their hawking mode," Mr Bethune said. "The biggest risk is that we tighten monetary policy too early and see a spike in interest rates." ...
And don't forget about jobs:
"While positive GDP growth is a necessary first step for job growth, our focus must remain on getting Americans back to work," Ms Romer said.

Paul Krugman predicted this GDP growth surge would come, and he warned us not to get too excited about it:

As expected, a big GDP number, signifying nothing much. It's an inventory blip: topline growth at 5.7 percent, but only 2.2 of that is final demand.

Here's the warning itself:

Calculated Risk beat me to this: the economists at Goldman Sachs are now predicting 5.8 percent growth in the fourth quarter. But they also say that the headline number will be highly misleading: two-thirds of the growth will be an inventory bounce, with final demand growing only 2 percent. In short, it will be a blip.
CR does miss one small trick, however: he asks when we last saw growth that high combined with rising unemployment, and says 1981. That's true. However, the last time we saw an initial report of 5.8 percent growth combined with rising unemployment is much more recent: the first quarter of 2002. The quarter's growth was later revised down, but at the time there was much unwarranted celebration (unemployment didn't peak until summer 2003).
So here comes the blip. Curb your enthusiasm.

Jim Hamilton is a bit more positive:

Just because the production gains can be accounted for in terms of slower inventory drawdown doesn't mean they aren't real, and doesn't mean they can't continue. I noted in July that we might expect inventory restocking to add 1.6% to the annual GDP growth rate for each of the first four quarters of the economic recovery, and we haven't even yet begun that inventory restocking process.
But he's not sounding the all clear just yet:
 The question, though, is what we'll see for the other components of GDP. Exports grew more than imports in Q4, with the result that net exports contributed 0.5 percentage points to that 2.3% growth in real final sales. That's certainly a very welcome development and a critical step for correcting the imbalances that have been very troubling over the last decade.
Government spending made no contribution to Q4 growth, which again is a consequence of the algebra of growth rates-- since real government purchases in Q4 were about what they had been in Q3, they made zero contribution to the growth rate, which is based on the change between Q4 and Q3. Fixed investment contributed 0.4 percentage points and consumption 1.4 percentage points to the 2.3% growth in real final sales and to the 5.7% growth in real GDP. Those are better numbers for consumption and fixed investment than we'd been seeing in the first half of the year, but not the sort you'd expect if a normal strong recovery was now fully in play.

Donald Marron breaks down GDP growth into its component parts:


More reactions:


My worry is simple. The Senate is about to take up the issue of what more can be done to help with job creation, and this report will give legislators unsure of how aggressively to pursue further job creation efforts a reason to come down on the side of doing very little, a mistake in my opinion. And it gives legislators opposed to further government help, or ideologically opposed to doing anything at all, the ammunition they need to resist any further fiscal policy efforts.

[Post echoed here.]

January 29, 2010

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Paul Krugman: March of the Peacocks

Posted: 29 Jan 2010 12:02 AM PST

Is our political system capable of solving the economic and fiscal problems that we face?

March of the Peacocks, by Paul Krugman, Commentary, NY Times: Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy "deficit peacocks." You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.
One week later, in the State of the Union address, President Obama proposed a temporary freeze in nondefense discretionary spending.
Wait, it gets worse. To justify the freeze, Mr. Obama used language ... almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: "American families are tightening their belt, but they don't see government tightening its belt." Obama now: "Families across the country are tightening their belts and making tough decisions. The federal government should do the same."
What's going on here? The answer, presumably, is that Mr. Obama's advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it's an indication of the extent to which we're failing to come to grips with our economic and fiscal problems.
The nature of America's troubles is easy to state. We're in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that's keeping us from sliding into a second Great Depression is deficit spending. And right now we need more ... deficit spending ... to bring unemployment down.
In the long run, however,... the ... budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we're going to have to find a way to run smaller, not larger, deficits. ... The sad truth, however, is that our political system doesn't seem capable of doing what's necessary.
On jobs, it's now clear that the Obama stimulus wasn't nearly big enough..., we're still facing years of mass unemployment. ... Yet there is little sentiment in Congress for any major new job-creation efforts.
Meanwhile, health care reform faces a troubled outlook. ...Democrats may yet manage to pass a bill; they'll be committing political suicide if they don't. But there's no question that Republicans were very successful at demonizing the plan. And, crucially, what they demonized most effectively were the cost-control efforts: modest, totally reasonable measures to ensure that Medicare dollars are spent wisely became evil "death panels."
So if health reform fails, you can forget about any serious effort to rein in rising Medicare costs. And even if it succeeds, many politicians will have learned a hard lesson: you don't get any credit for doing the fiscally responsible thing. It's better, for the sake of your career, to just pretend that you're fiscally responsible — that is, to be a deficit peacock.
So we're paralyzed in the face of mass unemployment and out-of-control health care costs. Don't blame Mr. Obama. There's only so much one man can do, even if he sits in the White House. Blame our political culture instead, a culture that rewards hypocrisy and irresponsibility rather than serious efforts to solve America's problems. And blame the filibuster, under which 41 senators can make the country ungovernable, if they choose — and they have so chosen.
I'm sorry to say this, but the state of the union — not the speech, but the thing itself — isn't looking very good.

links for 2010-01-28

Posted: 28 Jan 2010 11:03 PM PST

Ben Bernanke Reconfirmed: Will He Get the Message?

Posted: 28 Jan 2010 02:04 PM PST

Here's my reaction to the vote to reconfirm Ben Bernanke as Fed Chair:

Ben Bernanke Reconfirmed: Will He Get the Message?

January 28, 2010

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"Obama Sounded Like a Good Old-Fashioned Mercantilist"

Posted: 28 Jan 2010 01:11 AM PST

Andrew Samwick on Obama's the State of the Union speech:

One item that stood out as different was the acknowledgement that we are on our way to export-led growth, if we are to have growth at all. President Obama sounded like a good old-fashioned mercantilist with his claim that we would double exports in five years and support 2 million more jobs through those exports.

Export-led growth in what? Paul Krugman:

[I]t will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies — making U.S. production much less cost-competitive. Furthermore, even if the dollar falls again, where will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods — and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.

Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China's economy in particular is built around exporting to America, and will have a hard time switching to other occupations.

The problem is that if (net) exports don't lead the way, then consumption or investment must fill the void if the private sector is going to take care of this on its own. But neither of those seems likely to grow fast enough to accomplish this, at least not anytime soon, and there's some question whether they will return to their pre-crisis levels, consumption growth in particular.

Paul Krugman's point -- the quote is from a bit over a year ago -- was that if consumption, investment, and net exports can't support the growth we need to maintain employment, then government must use aggressive measures to bridge the gap until the private sector can make the necessary adjustments.

The government did bridge some of the gap with the stimulus package, but unfortunately it didn't do nearly enough and much of the gap still remains. The gap will close by itself -- eventually -- but in the meantime people will have to contend with labor markets that are weaker than they needed to be.

It's not too late for Congress to do more, but even if it fully enacts the measures that are currently pending, once again it will be well short of what's needed.

Fed Watch: Dissent

Posted: 27 Jan 2010 11:59 PM PST

Tim Duy reacts to today's FOMC meeting:

Dissent, by Tim Duy: The FOMC statement contained a mini-bombshell, the dissent of Kansas City Fed President Thomas Hoenig. I am skeptical, however, that this dissent is a significant shift in the policy environment. Instead, I view the statement as taking another baby step forward to a normalization of monetary policy now that the financial crisis has eased and that the economic environment has firmed. Many policymakers will simply find themselves increasingly uncomfortable holding rates at rock bottom levels while sitting on a bloated balance sheet -- regardless of the unemployment rate. Short of a significant reversal of recent economic gains, I would be hard pressed to see the Fed back away from a policy stance that is growing tighter, albeit slowly tighter.
The opening sentence of the statement maintains the position that the economy continues to strengthen while labor markets firm. Some may be surprised about the latter point given the disappointing December employment report. The Fed, however, will be expecting the road to sustained improvement to be bumpy; one month will not significantly impact their outlook given the sharp decline in the pace of job losses in the second half of 2009. The trend is clear. The Fed also upgraded slightly its assessment of business spending, consistent with data such as new orders for capital goods.
The opening paragraph, however, omitted mention of the housing market improvements as noted in the December statement. Are they less confident of a sustained rebound given the drop off that followed this summer's tax credit induced boom? Or do they just want to avoid mention of housing given that they intend to halt stimulus for that sector? In my opinion, of all the Fed interventions over the past year, the decision to acquire $1.25 trillion of mortgage securities is the most politically risky; more on that later.
Also dropped is the mention of monetary and fiscal stimulus. From December:
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
This evolved in January to:
Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
Certainly, it is no secret that the Fed is closing some of the emergency funding facilities (as noted later in the statement). Nor is it a secret that the Fed intends to halt its securities purchases and that fiscal stimulus will wane in the coming months. But the withdrawal of this support, however, does not appear to significantly impact their fundamental outlook of steady improvement. In other words, they appear to believe the economy can stand on its own - an important precursor to normalizing policy.
That expected improvement, however, will be slow enough to keep policymakers focused on stemming the balance sheet expansion long before raising interest rates. Hence the continued reliance on the phrase:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
It is widely expected that the Fed would remove the last clause of this sentence before embarking on any campaign to raise rates. And it is here that Hoenig caused something of a stir by objecting to this promise to hold rates low while accepting the current stance of policy. But Hoenig's views are not exactly a secret; he stepped up the hawkish rhetoric this month. He likely remains an outlier on the FOMC; note that it is likely there are outliers on the other side. St. Louis Fed President James Bullard, for instance, has indicated that he is uncomfortable moving to a blanket exit from balance sheet expansion, instead preferring a more state dependent policy that promises to adjust up, down, or steady as necessary. Indeed, he has repeatedly emphasized that interest rates should not be the focus of investor concern. Hoenig, of course, easily undid Bullard's work today and shifted focus back on rates.
I find it inconceivable that the Fed would be keen on normalizing rate policy without a substantial decline in unemployment, absent of course an unexpected surge of inflation. But the balance sheet is another issue. We can debate nonstop the merits of allowing inflation expectations to rise through sustained expansion of the balance sheet, but the Fed simply is not going there without clear evidence that deflation is the bigger risk than inflation. And note that this is not the direction the Fed is thinking -- the FOMC statement now sees it as only "likely" inflation will remain subdued, a slightly less certain statement compared to December. The Fed is ceasing expansion of the balance sheet in general and specifically halting its support of housing. The longer the economy exhibits signs of sustained growth -- even anemic growth -- the more the Fed will tend toward stepping up the pace of balance sheet contraction.
And therein lies a political problem greater than AIG and other financial market interventions. The Fed already plans to halt housing support and expects interest rates to rise. Policymakers are playing with fire here; more than any other sector, housing is considered sacrosanct among politicians. From the WSJ:
In its current buying spree, the Fed has spent most on supporting housing. Consider what might happen if the housing market starts to sag again–as recent numbers suggest is possible–and politicians call for extra support. If the Fed then reinstated mortgage buying, it would look like it was bowing to political demands, even it was actually doing so for purely monetary reasons.
Theoretically, reversing the balance sheet should not be a problem. The Fed can sell back what it bought. Moreover, officials believe tools such as interest on reserves would be effective in keeping sufficient money tied up in reserves even if financial market conditions precluded rapid asset sales. But what if the Fed is already at a point where it is politically impossible to sell mortgage based assets on any significant scale? Perhaps this explains the runup in inflation expectations in financial markets despite high unemployment and policymaker's repeated assertions that they effectively place more weight on low inflation than high unemployment. Financial markets may already anticipate that the Fed's independence was effectively lost the instant they explicitly and massively supported the most politically important sector in the economy. To be sure, academics can argue that such support was necessary to support asset prices and compensate for a very sector specific financial disruption. But backing out by definition means reversing support for that same sector, perhaps directly contributing to a rise in rates that threatens the very market the government is struggling to hold together. AIG could seem like small potatoes compared to the furor that would erupt if the Fed undermines this struggling sector.
Bottom Line: The Fed is crawling ever so slowly to the inevitable in the current economic environment -- normalizing monetary policy. Still, the normalization of rate policy is a long way off given the uncertainty over the pace of activity in the second half of this year and the expected persistent high rate of unemployment. To be sure, some policymakers will be eager to move more aggressively, but I think the data would need to be much stronger for this idea to move more broadly through the FOMC. The Fed will first gauge the financial and economic consequences of balance sheet normalization before they turn their attention to interest rates. Given that the Fed is growing increasingly confident that the economy can stand on its own in the absence of stimulus, the Fed is very unlikely to move into a more aggressive stance, despite high unemployment rates.

"Historical Look at the Labor Market During Recessions "

Posted: 27 Jan 2010 11:44 PM PST



[Click on figures to enlarge]

More here.

links for 2010-01-27

Posted: 27 Jan 2010 11:02 PM PST

America’s Employment Dilemma

Posted: 27 Jan 2010 11:41 AM PST

Had meetings all morning, teach all afternoon, then have a seminar to go to, and I'm running late. So I'll turn it over to Brad DeLong for, as they say, this important message:

America's Employment Dilemma, by J. Bradford DeLong, Commentary, Project Syndicate: There are always two paths to boost employment in the short term. The first path is to boost demand for goods and services, and then sit back and watch employment rise as businesses hire people to make the goods and services... The second path is not to worry about production of goods and services, but rather to try to boost employment directly through direct government hiring.
The first path is better: not only do you get more jobs, but you also get more useful stuff produced. The problem is that it does not take effect very quickly. ... Thus, policies ... needed to be put in place about a year ago... Some countries – China, for example – did, indeed, implement such job-creation policies a year ago and are already seeing the benefits. Others, like the United States, did not, and so unemployment remains at around 10%.  
This is not to say that the Obama administration did not try to boost employment. A year ago, it set five policy initiatives in motion:
  • Additional deficit spending;
  • Recapitalization of banks...;
  • Asset purchases by the US Treasury and other executive-branch entities to reduce the quantity of risky assets that the ... private sector was holding;
  • Continued monetary easing via very low Federal Funds rates;
  • Expansion of extraordinary policy interventions by the Federal Reserve.
The stress tests conducted by the US Treasury last year suggested that the banking sector had re-attained sufficient capital. And the Fed has continued its low-interest monetary policy.

But the dysfunctional US Senate capped additional deficit spending at $600 billion over three years – only half of the $1.2 trillion that was the technocratic goal. Moreover, the Fed became gun-shy and did not continue to increase its balance sheet beyond $2 trillion. ...
In short, perhaps two and a half out of the Obama administration's five policy initiatives came to fruition..., such limited action was not enough to keep the US unemployment rate below 10% – or even set it on a downward trajectory.
This brings us to the present moment,... there is now a very strong case to turn the focus of the US economy from measures aimed at increasing demand to measures aimed at boosting employment directly...
In practice, that means that the government either hires people and puts them to work or induces businesses to hire more people. We are talking about either direct government employment programs, or large tax credits for businesses...
There is still time for a substantial shift in federal spending toward high-employment ... if Congress acts quickly. And there is still time for a substantial temporary and incremental new-hire tax credit...
But will Congress act quickly? Given the depth of political polarization in the US, and thus the need for 60 of 100 votes in the Senate to end a Republican filibuster, there is no sign of it being able to do so. ... Don't hold your breath.

But don't quit pushing for more either.

“You Can’t Break This Bill Apart and Have it Work”

Posted: 27 Jan 2010 11:40 AM PST

One more quickie. Jonathon Gruber and Amy Finkelstein on health care reform: "Congress should still think big":

'All or nothing', by Peter Dizikes, MIT News Office: Just over a week ago, passage of a landmark federal health-care bill seemed a dead certainty. But the flip of a single U.S. Senate seat has changed all that, leaving the Democratic Party highly uncertain about how — or whether — to proceed. Given the current flux in Washington, a panel of MIT health-care experts assembled yesterday to assess the situation, often hammering home the idea that political half-measures will yield little in tangible health-care results.
"You can't break this bill apart and have it work," said MIT economist Jonathan Gruber. "It's all or nothing at this point..."
Brown's victory has caused multiple fractures among Capitol Hill Democrats. Some legislators want to drop the health-care effort entirely; others say Congress should only pass popular portions of it, such as making it illegal to deny insurance based on pre-existing conditions; and still others want to reconcile the existing, separate health-care bills already passed by the House and Senate.
Gruber made it clear he favors the last position, telling the audience the health-care plan is like "a three-legged stool," and "doesn't work unless you have all three legs." Those three pieces are reform of insurance markets (including banning those denials of coverage based on pre-existing conditions), the existence of an individual mandate requiring everyone to have insurance, and subsidies to make insurance affordable for low-income people.
For instance, simply allowing people with pre-existing conditions to sign up for insurance, Gruber argued, would be ineffective by itself. In that scenario, more people with pre-existing conditions would have coverage, rates would rise and lead healthy people to drop out of the insurance markets, and to compensate for those healthy people dropping out, insurance companies rates would raise rates further.
A hidden benefit of health insurance: Innovation
...Amy Finkelstein pointed out in her remarks [that] the value of universal health-care coverage goes beyond the medical services rendered. The introduction of Medicare in 1965, a subject she has studied in detail, produced "a dramatic decline in the share of the elderly with large out-of-the-pocket payments," Finkelstein said, meaning that it left more senior citizens in better financial shape than they would have been without Medicare.
Moreover, Finkelstein argued, Medicare went hand-in-hand with an increase in technological innovation in the health-care sector (from procedures to devices to drugs), a scenario that could be repeated if a serious bill is passed by this Congress. "If you have insurance, the idea that whatever happens to people who are uninsured isn't going to affect you is a very misleading notion," Finkelstein explained. "When you increase the share of the population with insurance, you increase the market size for these technologies, and you almost surely increase the pace of development of these technologies in the future."
But will any bill at all emerge from Congress? Political scientist Andrea Louise Campbell sounded a skeptical note. "The American political system is very status-quo-oriented," she said, with a lot of "veto points," such as the current Senate convention that the Democrats need 60 votes to pass the legislation.
Those 60 votes would not be necessary if Congress elected to use the reconciliation process, which would essentially mean that the House would pass the Senate bill, then have both branches of Congress modify it, which would require just 51 Senate votes in the end. Yet as Campbell noted, that would still be difficult: 47 Democratic House members represent districts that the Republican nominee, Sen. John McCain, carried in the 2008 presidential election, and may be unwilling to back any health-care bill at this point.
Alternately, Campbell suggested, those representatives might prefer to pass popular-sounding segments of the health-care bill, like lifting the pre-existing conditions blockage, even if the policy results seem dubious. "What might be feasible politically, might be disastrous economically," Campbell said. "They might pick out certain features without the counterbalancing features that make the whole package work. That might end up accelerating the unraveling of the system."

January 27, 2010

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Lobbying and the Financial Crisis

Posted: 27 Jan 2010 01:02 AM PST

This research finds evidence that financial firms that lobbied the most on mortgage lending and securitization issues (often successfully) took on the most risk, and experienced worse loan performance.

The conclusion to the article says that even though there's evidence that lobbyists contributed to lax lending standards, that doesn't necessarily mean that we should ban lobbying by financial firms. Why? The argument is that lobbyists may provide lawmakers with expertise and other information unavailable anywhere else, and that this can improve legislation and help to support financial innovation. So there are both costs and benefits. Thus, they say:

financial institutions may also lobby to reveal superior information on the mortgage lending market and gain support for innovation in financial services. In this view, lobbying serves a social purpose, and there may be better ways to contain risks than simply challenge lobbying.

But I'd turn that around and say "there may be better ways to reveal superior information on the mortgage lending market than to simply allow lobbying."

As to the "innovation in financial services" that lobbying supposedly helps to provide, even if lobbying does spur innovation, many people argue that the benefits of that innovation are small. If they're correct, and once you get past cash machines it's hard to think of financial innovation that has brought large benefits to society at large, it's not at all clear that the net social value of that innovation is positive. Whatever benefits may be present are more than offset by the costs associated with the innovation that contributed to the financial crisis:

Lobbying and the financial crisis, by Deniz Igan, Prachi Mishra, and Thierry Tressel, Vox EU: Should the political influence of large financial institutions take some blame for the financial crisis? In his speech at the 2010 annual meeting of the American Economic Association, Fed Chairman Ben Bernanke argued that, based on evidence of declining lending standards during the boom, "stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates" (Bernanke 2010).

Why wasn't financial regulation tightened before the crisis?

If regulatory action would have been an effective response to deteriorating lending standards, why didn't the political process result in such an outcome? Questions about the political process, through which financial reforms are adopted, are very timely now that the US Congress is considering financial regulatory reform bills.

A recent study by Mian, Sufi and Trebbi (forthcoming) shows, for example, that constituent and special interests theories explain voting on key bills, such as the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008, that were passed as policy responses to the crisis.

A number of news articles have reported anecdotal evidence that, in the run up to the crisis, large financial institutions were strongly lobbying against certain proposed legal changes and prevented a tightening of regulations that might have contained reckless lending practices. For example, the Wall Street Journal reported on 31 December 2007 that Ameriquest Mortgage and Countrywide Financial spent millions of dollars in political donations, campaign contributions, and lobbying activities from 2002 through 2006 to defeat anti-predatory-lending legislation.

There has, however, been no careful statistical analysis backing claims that lobbying practices may have been related to lending standards. In a recent paper (Igan, Mishra and Tressel, 2009), we provide the first empirical analysis of the relationship between lobbying by US financial institutions and their lending behavior in the run up to the crisis.

Data sources

Lobbyists in the US – often organized in special interest groups – can legally influence the policy formation process through two main channels.

  • First, they offer campaign finance contributions, in particular through political action committees.
  • Second, they lobby members of Congress and federal agencies about specific legislation.

In contrast to campaign contributions, these lobbying activities – which account for about 90% of expenditures on targeted political activity – have received scant attention in the academic literature.

The Lobbying Disclosure Act of 1995 requires lobbying firms and companies with in-house lobbying units to file reports of their lobbying expenditures with the Secretary of the Senate and the Clerk of the House of Representatives. Legislation requires the disclosure not only of the dollar amounts actually spent, but also the issues in relation to which the lobbying is carried out.

By going through individual lobbying reports, we identify all lobbying activities by financial institutions related to the regulation of mortgage lending and securitisation. During the period of the boom from 2000 to 2006, we find 16 pieces of federal legislation aimed at enhancing the regulation of predatory lending practices, none of which ever became law. The amounts spent on lobbying in relation to these laws were substantial and were spent mostly by large financial institutions.

The striking picture is that financial institutions lobbying on specific issues related to mortgage lending and securitisation adopted significantly riskier mortgage lending strategies in the run-up to the crisis.

We considered three measures of ex-ante loan characteristics: the loan-to-income ratio of mortgages, the proportion of mortgages securitised, and the growth rate of loans originated. The loan-to-income ratio measures whether a borrower can afford repaying a loan; as mortgage payments increase in proportion of income, servicing the loan becomes more difficult, and the probability of default increases. Recourse to securitisation is often considered to weaken monitoring incentives; hence, a higher proportion of mortgages securitised can be associated with lower credit standards. Fast expansion of credit could be associated with low lending standards if, for example, competitive pressures compel lenders to loosen lending standards in order to preserve market shares.

We find that, between 2000 and 2006, the lenders that lobbied most intensively to prevent a tightening of laws and regulations related to mortgage lending also:

  • originated mortgages with higher loan-to-income ratios,
  • increased their recourse to securitisation more rapidly than other lenders, and
  • had faster-growing mortgage-loan portfolios.

These findings suggest that lobbying by financial institutions was a factor contributing to the deterioration in credit quality and contributed to the build-up of risks prior to the crisis.

Further results

Our study offers two pieces of evidence showing that lobbying lenders experienced worse performance once the financial crisis started.

  • First, delinquency rates in 2008 were significantly higher in areas where mortgage lending by lobbying lenders had expanded relatively faster than mortgage lending by other lenders.
  • Second, these lobbying lenders experienced negative abnormal returns around the key events of the crisis (such as the collapse of Lehman Brothers).

All in all, this evidence suggests that these lenders had larger exposures to poorly performing mortgage loan pools.

Conclusions and policy implications

What are the implications of these findings for policy making?

  • Should lobbying be banned altogether because it is driven by rent-seeking?
  • Is lobbying symptomatic of other underlying problems?
  • Is lobbying, on the contrary, a channel through which lenders share their private information with policymakers?

With the benefit of hindsight, it seems reasonable to argue that lobbying by financial institutions can contribute to risk accumulation and threaten the stability of the financial system. Drawing precise policy implications, however, may not be straightforward, and would depend on the motives behind lobbying and lending practices.

Financial institutions may lobby to obtain private benefits, such as decreased scrutiny by bank supervisors, or higher likelihood of a bailout, and potentially under less stringent conditions. Under such rent-seeking motivations, lobbying is socially undesirable, all the more so as it contributes to financial instability. It should therefore be tightly regulated.

Lobbying may also reflect distorted short-term incentives within financial institutions; the perspective of high short-term gains may motivate both risk taking and lobbying. In this case, tackling the underlying distortion – by aligning managers' compensation with long-term profit maximisation – may be a more efficient way to limit excessive risk-taking than preventing lobbying.

More optimistically, financial institutions may also lobby to reveal superior information on the mortgage lending market and gain support for innovation in financial services. In this view, lobbying serves a social purpose, and there may be better ways to contain risks than simply challenge lobbying.

The ongoing legislative efforts to enhance banking supervision and regulation in the US provide another context to further our understanding of the motivation for lobbying by the financial sector. Recent reports show that financial institutions intensified their lobbying efforts in 2009 to fight against an overhaul of derivatives regulation and legislation. Johnson (2009) argues that substantial reform will fail unless the political power of the finance industry is weakened. Further work will be needed to ascertain whether this will be the case.


Bernanke, Ben (2010), "Monetary Policy and the Housing Bubble", Speech at the Annual Meeting of the American Economic Association, Atlanta, 3 January.

Igan, Deniz, Prachi Mishra, and Thierry Tressel (2009), "A Fistful of Dollars: Lobbying and the Financial Crisis", IMF Working Paper 09/287.

Johnson, Simon (2009), "The Quiet Coup", The Atlantic, May.

Mian, Atif, Amir Sufi, and Francesco Trebbi (forthcoming), "The Political Economy of the US Mortgage Default Crisis", American Economic Review.

Simpson, Glenn R (2007), "Lender Lobbying Blitz Abetted Mortgage Mess", The Wall Street Journal, 31 December.

"The Quarrel Over Bernanke"

Posted: 27 Jan 2010 12:34 AM PST

There's always room for more debate on Ben Bernanke's reconfirmation:

The Quarrel Over Bernanke, Room for Debate: The Senate is expected to vote this week on whether to confirm Ben Bernanke to a second term as the Federal Reserve chairman. Though it appears that he will overcome a filibuster threat, opposition to Mr. Bernanke has grown, along with worsening jobs numbers and public anger over the Fed's failure to regulate banks before the financial crisis. His Democratic and Republican opponents have criticized him as the architect of the Wall Street bailout and being out of touch with the woes of Main Street.

How much is Mr. Bernanke to blame for the regulatory failures, the weak recovery and high unemployment numbers? Could a new Fed chairman make a difference?

One of the Fifty Little Hoovers

Posted: 26 Jan 2010 11:22 PM PST

This is still hard to believe given the recent history of this state when it comes to taxes of any kind:

Oregon Voters Approve Tax Increase, by William Yardley, NY Times: Two ballot measures that would raise taxes on businesses and higher-income residents in Oregon appeared headed for approval late Tuesday.
The tax increases, which would raise about $727 million largely for public education and social services, were approved last year by the Legislature, but later put to a public referendum after opponents gathered signatures in a petition campaign.
The Legislature, controlled by Democrats, has already put the $727 million into the current budget. So if the ballot items, known as Measures 66 and 67, had been rejected, lawmakers would have been forced to hold a special session to find other ways to reduce spending or raise revenue.
Tax measures have frequently failed at the polls in Oregon, one of only five states without a state sales tax. ...
Experts noted that, given the broader recession and Oregon's 11 percent unemployment rate, Measures 66 and 67 had been carefully drawn to focus on wealthier residents and businesses. Measure 66 raises income taxes on individuals who earn more than $125,000 and on couples who earn more than $250,000... Measure 67 raises taxes and fees on most businesses. ...

As I said here, it would be better if federal help had been available and we didn't have to raise taxes or cut spending in a recession. But there was no choice but to do one or the other (or some combination of both), and this was the best available option.

Update: Kevin Drum adds:

I await the immediate immolation of Oregon's economy. That's what happened to America after Clinton raised taxes on the rich, after all.

links for 2010-01-26

Posted: 26 Jan 2010 11:02 PM PST

What is the Role of Politics in Implementing Economic Policy?

Posted: 26 Jan 2010 04:34 PM PST

Greg Mankiw points to Thomas Cooley's discussion of Obama's proposed bank tax:

The Problems With The Bank Tax, by Thomas F. Cooley: Last week the Obama administration announced a plan to impose significant new taxes on banks. It was high political drama. ... The whole tone of the announcement was that of a trip to the woodshed for misbehaving banks. The tax was presented as ... punitive...
The problem here is not the taxes per se. It is that the administration elected to treat the imposition as populist political theater. In doing so it missed the opportunity to articulate a well-reasoned economic policy to deal with too-big-to-fail institutions. ...
Another problem with treating the tax as punitive rather than regulatory is that it gives the banks and other financial institutions the ammunition to fight it. This administration tends to treat too many of the economic problems it faces as political. They end up being far less effective.
There is a very sound argument for levying new fees on financial institutions. The financial system as it is currently structured is extremely distorted, and its distortions are due to the way the system was regulated and by the regulators' responses to the financial crisis. ...
It is now clear to almost everyone except the institutions themselves that we created a big problem. Firms that are deemed too big or too systemic to fail have a safety net. They can take bigger risks and make bigger bets, secure in the belief that the government (or taxpayers) will guarantee their liabilities if they fail. Not only does this create perverse incentives for the risks that they take, it lowers their cost of raising new capital.
In the heat of the financial crisis Henry Paulson, Tim Geithner, Ben Bernanke and others decided it was better to protect all of the troubled firms (except Lehman and Washington Mutual) rather than let them fail. ...
That was then. Now we must figure out how to undo the damage. In a more perfect world we would do three things: 1. modify the bankruptcy code and create mechanisms to allow for the orderly failure of these institutions; 2. impose a tax on them that is proportional to the risk to the system that they create; and 3. treat that tax as an insurance premium to cover the cost of future problems, just as the FDIC charges banks for deposit insurance. ...
An important flaw in the tax is that it is designed only to recover the bailout costs already incurred. It should be an ongoing charge for the insurance against risky behavior. There should be two parts to such a charge: A portion to cover the risk a firm creates for itself and its investors by taking on excessive leverage, and a portion to cover the risk that leverage creates for the system as a whole. Ideally what we want is a fund that can cover the costs of a shock to the system in the future without the involvement of taxpayers. ...
At the end of the day what we need are mechanisms to deter excessive risk-taking at the expense of the taxpayer. The proposed tax is a very imperfect step in that direction. But we should hope that at the end of the process of designing a new regulatory structure we will have a set of measures that protect the taxpayer from having to bail out the financial system in future crises. One lesson that history teaches us very clearly is that crises will occur.

Before I read this, I assumed I'd disagree strongly, but I don't -- I mostly agree. However, I don't think the recommendation that the administration focus on economics rather than politics is good advice.

The main reason he gives for this advice is that the the current strategy "gives the banks and other financial institutions the ammunition to fight" the tax. However, the banks are going to fight the tax in any case, and they can play the "victim of populist backlash" whether or not the administration specifically identifies the tax as punitive (e.g. "the Obama administration says it's for economic reasons, but this is nothing more than populist pandering resulting from fear of losses in November...").Why fight with just one hand when the other side will use both?

And anyway, what's wrong with saying that banks need to punished when the meaning of punished is to pay taxpayers taxpayers back? He objects that this was portrayed as "a trip to the woodshed for misbehaving banks," but isn't that how changing incentives works? Would bank behavior improve in the future if they weren't asked to pay for the damage they caused, if they weren't figuratively "taken to the woodshed"? How do you change incentives without the fear of a penalty (punishment) of some sort? How do you credibly establish that the penalty will be assessed in the future if it is not assessed now?

We're not even asking that banks and other financial institutions pay the full cost of the damage they caused, only the part that taxpayers covered. That is far, far short of the total damage.

I don't want politics to be used to implement bad economic policy as has clearly happened in the past, so I fully agree that the economic arguments need to be clearly articulated. Good economics is, or at least should be, a necessary condition before the political arguments are made. But good economics is not a sufficient condition for good policy, and the political arguments have a role to play.

[I'm not completely comfortable with this argument, so let me offer it as something to argue for or against rather than a solidly held position.]

Is Geithner a "Dead Man Walking"?

Posted: 26 Jan 2010 11:24 AM PST

Barry Ritholtz thinks that Tim Geithner's days may be numbered:
Geithner: Dead Man Walking?, by Barry Ritholtz: As the pile of revelations regarding the NY Fed's bailout of AIG gets deeper and uglier, the sense that Treasury Secretary — and former NY Fed President — is a short timer.
On the interview with Jim Bianco, he mentioned Geithner was a dead man walking — and He has been for sometime. The White House is just waiting for the right time to dump him.
That might be true — and changing the preserve the status quo parts of the Economic team is a good idea.
But what does that say about Summers? In some quarters, he is the most important person on the planet — Politico shows the President's calendar everyday. He has a daily economic briefing at 10AM everyday when he is in town.
This briefing is run by Summers.
In other words, Summers controls the economic information flow to the President. With this as a job description, Treasury Secretary is a step down . . .

Summers is not the only person in the world with brains, but no matter his talents, appointing Summers as Treasury Secretary would be a political disaster. If Obama believes he is indispensable, better to give him an important role that is out of the public eye. That's essentially the job he has now, but he is still in public more than I think is necessary. I don't think it helps the administration on net.

As for Geithner, I'm not calling for his head, but I wouldn't step forward to defend him either (and I'd be interested to hear from the Internet's Chief Treasury Applogist Officer). In any case, I'd be surprised if the administration actually removes him.