This morning it is clear that we are being given the bright side. Uemployment less than expected, great. But still down (dpn’t mention it.). The positive spin is extreme. AIG makes a profit, great, AIG takes a big loss, hide it in the back pages. ets start with the helpful Baseline Scenario
In a memo to Congress on Tuesday, Larry Summers – the head of the White House National Economic Council – laid out his view of where we are and what is likely to happen next in our economic recovery.
“our economic recvery”hides the fact that it is recovery for some but not all, or even most.
His tone was more upbeat than we’ve heard in recent utterances, although he has been heading in this direction for a while – contrast this April speech with this appearance in July.
What is beginning to turn the economy around? Summers claims great effects from the fiscal stimulus Recovery Act, but much of that money has not yet been spent.
ouch
He also puts weight on “an aggressive effort to tackle the foreclosure crisis.” There have been sensible steps in that direction, but so far the effects have been decidedly modest.
To say the least. some few thousad homes.
The main explanation has to be that the administration prevented the financial system from collapsing. In an economy as large and diverse as that of the United States – with much more government spending than at the time of the Great Depression – as long as the entire provision of credit does not disintegrate, we will recover.
So the big banks made out, and now, given that the money has flowed to them, to call end of recession before they get stuc with higher taxes to help the rest of the economy.
Summers refers to “A Financial Stabilization Plan”, but this is ex post grandiosity. In fact, the government simply demonstrated unflinching support for all big financial firms as currently constituted. We the taxpayer effectively guaranteed all these firms debts, unconditionally. Once the market figured out that the Treasury, Federal Reserve and other officials could pull this off, the panic was over.
But this victory brings also real danger.
Rahm Emanuel, the White House Chief of Staff, put it well recently, “The [finance] industry is already back to their pre-meltdown bonuses. We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”
Does this have any real follow up?
the administration “has unveiled a sweeping set of regulatory reforms.” But the reality is more modest. There will be some slight strengthening of capital requirements, somewhat more attention paid to “systemic risk” (although this is not well defined), and mildly tougher regulation of derivatives. Most of this amounts to essentially business as usual.
Second, to the extent that the administration does have a few good ideas – for example on a new consumer protection agency for financial products – it has let opposition build to the point where the lobbyists may well be able to prevent progress. The time to push for change was earlier this year, when banking was still in political disarray; now the sector is stronger than even on Capitol Hill
Read the rest of this entry via The Baseline Scenario. from same author in NYT.