• Monthly
  • $25
  • $50
  • $100
  • $other
  • use PayPal

CounterPunch needs you. piggybank-icon You need us. The cost of keeping the site alive and running is growing fast, as more and more readers visit. We want you to stick around, but it eats up bandwidth and costs us a bundle. Help us reach our modest goal (we are half way there!) so we can keep CounterPunch going. Donate today!
FacebookTwitterRedditEmail

More of the Same at Treasury

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.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

bernie-the-sandernistas-cover-344x550

May 23, 2019
Kenn Orphan
The Belligerence of Empire
Ralph Nader
What and Who Gave Us Trump?
Ramzy Baroud
Madonna’s Fake Revolution: Eurovision, Cultural Hegemony and Resistance
Tom Engelhardt
Living in a Nation of Political Narcissists
Binoy Kampmark
Challenging Orthodoxies: Alabama’s Anti-Abortion Law
Thomas Klikauer
Why Reactionaries Won in Australia
John Steppling
A New Volkisch Mythos
Cathy Breen
So Many Wars: Remembering Friends in Iraq, Jordan, Syria, Kurdistan and Turkey 
Chuck Collins
Ending the Generational Abuse of Student Debt
Robert J. Burrowes
Understanding NATO, Ending War
Nyla Ali Khan
Dilution of “Kashmiriyat” and Regional Nationalism
May 22, 2019
T.J. Coles
Vicious Cycle: The Pentagon Creates Tech Giants and Then Buys their Services
Thomas Knapp
A US War on Iran Would be Evil, Stupid, and Self-Damaging
Johnny Hazard
Down in Juárez
Mark Ashwill
Albright & Powell to Speak at Major International Education Conference: What Were They Thinking?
Binoy Kampmark
The Victory of Small Visions: Morrison Retains Power in Australia
Laura Flanders
Can It Happen Here?
Dean Baker
The Money in the Trump/Kushner Middle East Peace Plan
Manuel Perez-Rocha – Jen Moore
How Mining Companies Use Excessive Legal Powers to Gamble with Latin American Lives
George Ochenski
Playing Politics With Coal Plants
Ted Rall
Why Joe Biden is the Least Electable Democrat
May 21, 2019
Jeremy Kuzmarov
Locked in a Cold War Time Warp
Roger Harris
Venezuela: Amnesty International in Service of Empire
Patrick Cockburn
Trump is Making the Same Mistakes in the Middle East the US Always Makes
Robert Hunziker
Custer’s Last Stand Meets Global Warming
Lance Olsen
Renewable Energy: the Switch From Drill, Baby, Drill to Mine, Baby, Mine
Dean Baker
Ady Barkan, the Fed and the Liberal Funder Industry
Manuel E. Yepe
Maduro Gives Trump a Lesson in Ethics and Morality
Jan Oberg
Trump’s Iran Trap
David D’Amato
What is Anarchism?
Nicky Reid
Trump’s War In Venezuela Could Be Che’s Revenge
Elliot Sperber
Springtime in New York
May 20, 2019
Richard Greeman
The Yellow Vests of France: Six Months of Struggle
Manuel García, Jr.
Abortion: White Panic Over Demographic Dilution?
Robert Fisk
From the Middle East to Northern Ireland, Western States are All Too Happy to Avoid Culpability for War Crimes
Tom Clifford
From the Gulf of Tonkin to the Persian Gulf
Chandra Muzaffar
Targeting Iran
Valerie Reynoso
The Violent History of the Venezuelan Opposition
Howard Lisnoff
They’re Just About Ready to Destroy Roe v. Wade
Eileen Appelbaum
Private Equity is a Driving Force Behind Devious Surprise Billings
Binoy Kampmark
Bob Hawke: Misunderstood in Memoriam
J.P. Linstroth
End of an era for ETA?: May Basque Peace Continue
Weekend Edition
May 17, 2019
Friday - Sunday
Melvin Goodman
Trump and the Middle East: a Long Record of Personal Failure
Joan Roelofs
“Get Your Endangered Species Off My Bombing Range!”
Jeffrey St. Clair
Roaming Charges: Slouching Towards Tehran
FacebookTwitterRedditEmail