Sunday, January 11, 2009

The Great Recession

The Great Recession
by Matthew Rothschild

January 2009 Issue

The economists were the second to last ones to figure out we're in a
recession. The last one was George Bush himself, but he doesn't care.
He's been phoning in his job for months now anyway.

But people who were losing their jobs, people who were losing their
homes, and all those who've seen their retirement accounts lose 40
percent of their value—they all know we've been in a recession for
some time.

And it's not just any recession.

This one's a whopper. It's likely to be the roughest recession in
forty years, at least. And it's going to last a lot longer than its

This is what happens when the idolatry of the free market prevails
over common sense, when greed skims over the lessons of 1929.

We wouldn't be in the Great Recession today if Bill Clinton and Robert
Rubin hadn't deregulated the financial industry.

We wouldn't be in the Great Recession today if Alan Greenspan and Ben
Bernanke and Henry Paulson hadn't let the housing bubble expand to the
popping point.

We wouldn't be in the Great Recession today if the Bush Administration
had bailed out homeowners instead of just bankers.
But here we are, right smack in the middle of the Great Recession, and
now it's on Barack Obama's plate.

At least he's talking some sense. Since winning the Presidency, Obama
has been upfront with the American people about the need to engage in
massive deficit spending in 2009 and 2010 to rescue the economy. This
is a basic Keynesian prescription, although for many it is a hard
medicine to swallow, especially after the debt Bush has run up in
Iraq. But swallow we must.

Obama may have to spend between $500 billion and $1 trillion to
forestall double-digit unemployment. What he spends that money on is
almost as vital as the aggregate amount. Fortunately, he is wisely
talking about repairing our infrastructure, sharing money with state
governments, and initiating a green jobs program. These expenditures
will give us the most bang for the buck, and they will lay the
foundation for long-term growth that is not so ruinous to our

Unfortunately, his economic appointments leave a lot to be desired. He
could have picked someone like Joseph Stiglitz or James Galbraith or
Dean Baker to head the Treasury and the National Economic Council. All
have been critics of corporate globalization. All are strong
proponents of reregulating financial institutions and reflating the

Instead, he chose Lawrence Summers to head the council and Timothy
Geithner to be Treasury Secretary. Both are experienced at ramming
free market policies down the throats of other nations. Both were
disciples of Robert Rubin when he began to deregulate the financial
industry as Clinton's Treasury Secretary in the late 1990s.

Summers served as chief economist at the World Bank from 1991 to 1993,
when it was foisting structural adjustment policies on developing
nations. And when he moved over to Treasury, he got Stiglitz fired
from the World Bank after the Nobel Prize-winner criticized such

"Spread the truth—the laws of economics are like the laws of
engineering," he said while at the World Bank. "One set of laws works
You can find this quote
in Naomi Klein's Shock Doctrine: The Rise of Disaster Capitalism, a
must-read. She points out how Summers ran roughshod over Russia's
parliament to impose economic shock therapy there in 1993, when he had
moved over to Treasury.

"The momentum for Russian reform must be reinvigorated and
intensified," Summers said, after the parliament had refused to go
along. Shortly after that comment, the International Monetary Fund
threatened to withhold a $1.5 billion loan. So Boris Yeltsin dissolved
and attacked parliament, abolished the constitution, and bowed to the
IMF's and Summers's demands. Summers kept the heat on, demanding that
"privatization, stabilization, and liberalization" must all be
completed post-haste, Klein reports.
The results were catastrophic. "Russia's 'economic reforms' can claim
credit for the impoverishment of seventy-two million people in only
eight years," Klein writes.

Summers also helped knock down Glass-Steagall, the wall erected in the
New Deal to keep commercial banks and investment houses separate.

Then as Treasury Secretary, Summers approved the deregulation of the
financial industry even further. He and Clinton signed off on the
Commodity Futures Modernization Act that removed oversight from the
credit default swaps and derivatives trading that have so imperiled
our economy.

Summers was Rubin's disciple. And Timothy Geithner is Summers's disciple.

Geithner got his start working for Kissinger and Associates, which
should be a disqualification in and of itself. So, too, should be
working for the IMF for Bush Jr., which Geithner did from 2001 to

In between, Geithner worked in the Treasury Department under Bush I
and Clinton, focusing on international economic affairs. In the late
1990s, he was responsible for overseeing the Asian crisis.

As Klein notes, the Treasury Department "was in no rush to stop the
pain." In fact, it used the crisis in Indonesia, South Korea, and
Thailand to force them to abandon policies aimed at self-sufficiency
and to impose policies that would open those economies to U.S.
corporations and banks. Never mind that the dictates of the Treasury
Department and IMF inflicted enormous pain. "In South Korea, 300,000
workers were fired every month," Klein writes. "In 1996, 63.7 percent
of South Koreans identified as middle class; by 1999 that number was
down to 38.4 percent."

Since 2003, Geithner has been president of the Federal Reserve Bank of
New York. He testified to Congress in March that he couldn't explain
what precipitated the financial instability we're in right now.

"What produced this is a very complicated mix of factors," he said. "I
don't think anybody understands it yet."

That's either a cop-out or a confession. Maybe he should have just
taken the Fifth. Because he's also been intimately involved with the
criminally negligent bank bailouts.

"His easy terms protected shareholders and executives but demanded
almost nothing from the failing banks for the public," William Greider
noted in The Nation. "Worst of all, the deals did not work. They have
failed to stabilize much of anything and are still putting Wall Street
preservation ahead of the national interest. Where is the evidence
that we can expect a different approach if Geithner is in charge? Or
even that he understands the true dimensions of this crisis?"

Another disturbing appointment by Obama was Peter Orszag to head up
the Office of Management and Budget. When he was on the campaign
trail, Obama accused John McCain of planning to cut Social Security
Well, Orszag wants to do that, too.

In 2005, he co-wrote a paper called "Saving Social Security: The
Diamond-Orszag Plan." It calls for "a reduction in benefits, which
would apply to all workers age 59 and younger." The younger you are,
the more you'll get hurt.

"The reduction in benefits for a forty five-year-old average earner is
less than 1 percent," his plan says. "For a thirty-five-year-old, less
than 5 percent; and for a twenty-five-year-old, less than 9 percent."

Social Security is not in crisis. And there's no reason to be hacking
away at the safety net—especially if you're a Democrat.

Now is the time for a new New Deal, not for ripping up the old one.

At some level, Obama appears to understand that. But his economic
team—that's another story.

—Matthew Rothschild
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