FacebookTwitterGoogle+RedditEmail

More of the Same at Treasury

by DEAN BAKER

Last week President Obama announced his intention to replace retiring Treasury Secretary Timothy Geithner with Jack Lew, who currently serves as his chief of staff. This pick indicates that there will be little change in President Obama’s economic agenda in his second term.

The first term agenda was focused on stabilizing the economy and restoring the financial system. Geithner took the latter task to mean preserving the existing structure under which a small number of large banks dominate the nation’s financial industry.

This effort required massive government intervention in the industry in the form of the $700 billion lent from the Treasury through the Troubled Assets Relief Program (TARP), trillions lent from the Federal Reserve Board through various special lending facilities, and trillions of dollars of guarantees provided by the Fed and the Federal Deposit Insurance Corporation. In addition, it was deemed necessary to establish special lending facilities to sustain two of the four biggest banks, Citigroup and Bank of America.

This effort succeeded, with the big banks having largely returned to their pre-recession levels of profitability. While there was considerable sentiment for breaking up the large banks in the wake of the financial crisis, the big banks are now larger than ever as a result of several major mergers in the middle of the crisis.

This development is especially striking since the concentration in the U.S. financial industry is a very recent phenomenon. Prior to the 1980s, interstate banking was extremely limited, which prevented any one bank from gaining dominance in the national market. The crisis might have led to regulations that would make the financial industry look more like it did three decades ago.

However, the Obama Administration kept Congress on a short leash when it was producing a financial reform bill. As a result, the system is little changed.

There is no reason to believe that Lew would take any different approach going forward. Lew had served in high-level positions in the Clinton administration, most importantly serving as the director of the Office of Management and Budget (OMB) during the last two years of the administration.

After leaving the Clinton Administration, Lew served a stint as a top executive in Citigroup, leaving just as the financial crisis was peaking in order to enter the Obama Administration. He collected several million dollars for his work. Lew is not someone who is likely to be hostile to the Wall Street banks.

While the Obama Administration supported a substantial stimulus in its first month in office, since that time it has maintained a focus on deficit reduction. This focus is occurring despite the fact that the U.S. economy is still operating at a level of output that is close to $1 trillion below potential GDP. There also is little basis for concern about the United States’ ability to borrow in financial markets. While interest rates have risen somewhat in recent weeks, the rate on long-term Treasury bonds is still well below 2.0 percent, which is near a low for the post-World War II era. The burden of interest as a share of GDP is also near its post–war low.

These factors suggest that policy would be much better focused on stimulating the economy than reducing the deficit. However there is nothing in Lew’s background that suggests he may try to push a turn in the direction of greater stimulus.

Lew’s stint as director of OMB coincided with the years in which the U.S. government was running large budget surpluses: the only surpluses of the last half century. While the reality is that these surpluses were only made possible by a stock market bubble driven consumption and investment boom, it is Democratic Party folklore that the surpluses and strong growth at the end of the 90s were the result of President Clinton’s economic policy.

In the Democratic Party folklore, the basis for the good news at the end of the decade was the tough decisions that President Clinton made when he first took office. In his first year in the White House, President Clinton pushed through a package of tax increases and spending cuts. The folklore holds that this deficit reduction was the basis of everything good that followed.

It is easy to show that the stock bubble, with price-to-earnings ratios rising to more than double their historic levels, was actually the basis for the end-of-decade prosperity. The bubble was of course unsustainable and when it burst we got the recession in 2001. That recession, while officially short and mild, led to the longest period without job growth since the Great Depression.

But that is not the message that the Democrats or Jack Lew take from the history of the 90s. For them, it is a story where everything good comes from deficit reduction. This means that we can expect that Lew will continue the current obsession with the deficit and ignore the economy’s weakness. That is likely to mean four more years of subpar growth.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Caixin Online.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

August 25, 2016
Mike Whitney
The Broken Chessboard: Brzezinski Gives Up on Empire
Paul Cox – Stan Cox
The Louisiana Catastrophe Proves the Need for Universal, Single-Payer Disaster Insurance
John W. Whitehead
Another Brick in the Wall: Children of the American Police State
Lewis Evans
Genocide in Plain Sight: Shooting Bushmen From Helicopters in Botswana
Daniel Kovalik
Colombia: Peace in the Shadow of the Death Squads
Sam Husseini
How the Washington Post Sells the Politics of Fear
Ramzy Baroud
Punishing the Messenger: Israel’s War on NGOs Takes a Worrying Turn
Norman Pollack
Troglodyte Vs. Goebbelean Fascism: The 2016 Presidential Race
Simon Wood
Where are the Child Victims of the West?
Roseangela Hartford
The Hidden Homeless Population
Mark Weisbrot
Obama’s Campaign for TPP Could Drag Down the Democrats
Rick Sterling
Clintonites Prepare for War on Syria
Yves Engler
The Anti-Semitism Smear Against Canadian Greens
August 24, 2016
John Pilger
Provoking Nuclear War by Media
Jonathan Cook
The Birth of Agro-Resistance in Palestine
Eric Draitser
Ajamu Baraka, “Uncle Tom,” and the Pathology of White Liberal Racism
Jack Rasmus
Greek Debt and the New Financial Imperialism
Robert Fisk
The Sultan’s Hit List Grows, as Turkey Prepares to Enter Syria
Abubakar N. Kasim
What Did the Olympics Really Do for Humanity?
Renee Parsons
Obamacare Supporters Oppose ColoradoCare
Alycee Lane
The Trump Campaign: a White Revolt Against ‘Neoliberal Multiculturalism’
Edward Hunt
Maintaining U.S. Dominance in the Pacific
George Wuerthner
The Big Fish Kill on the Yellowstone
Jesse Jackson
Democrats Shouldn’t Get a Blank Check From Black Voters
Kent Paterson
Saving Southern New Mexico from the Next Big Flood
Arnold August
RIP Jean-Guy Allard: A Model for Progressive Journalists Working in the Capitalist System
August 23, 2016
Diana Johnstone
Hillary and the Glass Ceilings Illusion
Bill Quigley
Race and Class Gap Widening: Katrina Pain Index 2016 by the Numbers
Ted Rall
Trump vs. Clinton: It’s All About the Debates
Eoin Higgins
Will Progressive Democrats Ever Support a Third Party Candidate?
Kenneth J. Saltman
Wall Street’s Latest Public Sector Rip-Off: Five Myths About Pay for Success
Binoy Kampmark
Labouring Hours: Sweden’s Six-Hour Working Day
John Feffer
The Globalization of Trump
Gwendolyn Mink – Felicia Kornbluh
Time to End “Welfare as We Know It”
Medea Benjamin
Congress Must Take Action to Block Weapon Sales to Saudi Arabia
Halyna Mokrushyna
Political Writer, Daughter of Ukrainian Dissident, Detained and Charged in Ukraine
Manuel E. Yepe
Tourism and Religion Go Hand-in-Hand in the Caribbean
ED ADELMAN
Belted by Trump
Thomas Knapp
War: The Islamic State and Western Politicians Against the Rest of Us
Nauman Sadiq
Shifting Alliances: Turkey, Russia and the Kurds
Rivera Sun
Active Peace: Restoring Relationships While Making Change
August 22, 2016
Eric Draitser
Hillary Clinton: The Anti-Woman ‘Feminist’
Robert Hunziker
Arctic Death Rattle
Norman Solomon
Clinton’s Transition Team: a Corporate Presidency Foretold
Ralph Nader
Hillary’s Hubris: Only Tell the Rich for $5000 a Minute!
FacebookTwitterGoogle+RedditEmail