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Department of "Huh!?"--No, Department of "WTF!?!?!?!?": Robert Lucas Edition

Review of Ron Suskind's "Confidence Men"

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When I first learned in 2009 that Ron Suskind's next book was going to be about the making of a economic policy in the Obama administration, I looked forward to it. Previous books about the making of economic policy had degenerated into unseemly hagiography (cough Robert Woodward's Maestro cough) or into pure gotcha books (cough Robert Woodward's The Agenda cough). It seemed to me that Ron Suskind had done considerably better than "gotcha" books -- or had written "gotcha" books that also had immense extra value added -- on the Bush-era national security apparatus.

I thought he would do equally well on economic policy.

I thought the Obama economic-policy team was first rate. All five of the principals, Benjamin Bernanke, Timothy Geithner, Lawrence Summers, Christina Romer, and Peter Orszag, seemed to me among the very best candidates in the world for senior economic policymaking jobs in an American administration.

And they were all my friends, or at least we were friendly. I did think that some of them were in the wrong jobs. Lawrence Summers made much more sense to me as Treasury Secretary than as NEC chair. Timothy Geithner seemed to me much better suited to be NEC Chair than to manage a large department with line authority.

Nevertheless, even though the economic situation was horrible, the economic policy team looked good to me. I looked forward to a Suskind book that would tell of success: smart and serious people who knew what they were doing fighting about substance, presenting the president with good options, him choosing the best one, and the course of the economy during the Obama administration being if not great at least better than we all feared after the bankruptcy of Lehman Brothers.

And there is an important perspective from which Obama administration economic policy has been a considerable success. The banking system collapse was averted. The spike of the unemployment rate to 15% or higher was averted. Obama passed a pretty good financial regulatory reform. Obama passed a pretty good health-care financing reform. Obama passed the largest quick fiscal expansion he could get through congress (using the Reconciliation process would have taken months and months longer). We are left with a jobless recovery, and with crippled mortgage finance and construction, and a ticking bomb in Europe. But one could say that things could have been much worse--and would have been much worse had Republicans controlled any substantial share of economic policy or been more effective at blocking Obama initiatives. This may in the end be the judgment of history: that the most important thing to note about the Obama Administration's macroeconomic policy was that they, broadly, worked.

And of the successes of Obama administration economic policy perhaps the greatest success was the successful implementation of the "stress tests" of the banking system by Tim Geithner and his Treasury Department in the spring of 2009. The panic and the downturn could not be halted until finance became convinced once again that the key highly-leveraged money-center banks were well-capitalized. The government's TARP authority was not large enough to do the job. Somehow, private investors had to be convinced that investing in the banks was a good idea. The stress tests did that, and played a role in restoring confidence in 2009 somewhat akin (albeit on a smaller scale) to Roosevelt's abandoning the gold standard in 1933. It was a major achievement, well-executed--especially given that Tim Geithner was then "home alone" at the Treasury without confirmed deputies.

But this is not the only perspective from which to view Obama administration economic policy.

Since the spring of 2009 I have became more and more alarmed by the economic policy choices made by the Obama administration. A new administration needs to (1) forecast what is most likely to happen, and (2) design and implement policies that will deal with what is likely to happen, The Obama administration did that. I think that some of its initial policies were wrong, but given the press of events I would give the administration moderately high marks for the policies it designed and implemented up through, say, April 2009.

Thereafter, however, things to me seemed to gradually fall apart. An administration has a third task it needs to carry out: (3) think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well.

It needs to ask itself:

  • What if we are wrong in our estimation of the situation--what might the world then look like three years from now? 

  • What if more things go wrong in the next year or two--what might the world then look like three years from now?

  • In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?

The major risks that confronted the Obama administration-to-be in the fall of 2008 and the winter-spring of 2009 that are relevant here were:

  1. That the moderate Republicans in the Congress would, rather than engaging in normal American governance, join their colleagues out of party loyalty and help them wage a scorched-earth war against all administration policies--even their own Republican policies--following the Gingrich playbook that the road to victory in the next election is to make the Democratic President be and appear to be a failure.

  2. That the Federal Reserve would ignore half of its dual mandate, and be satisfied with policies that avoided deflation now matter what unemployment rate or capacity utilization rate those policies brought. 

  3. That the recovery that would follow once the recession was over would be a slow, hesitant, "jobless" recovery. 

  4. That the initial shock to the financial system and downturn would be much larger than anticipated as of early December 2008. 

  5. That mortgage finance might not resolve itself, and that construction might remain deeply depressed for a very long time.

  6. That government attempts to support weak banking systems would set off a wave of sovereign debt crises that would then deepen the global downturn.

  7. That repeated waves of expansionary policies might set off a dollar, sovereign debt, and inflation crisis inside the United States.

To deal with all of these, Obama needed to staff his administration up--to choose and nominate officials and, if the Senate did not confirm them in a timely fashion, recess-appoint them.

To deal with the first of these seven, the Obama administration needed to set up the Budget Act Reconciliation process and to husband executive branch authority so that it could conduct large-scale expansionary economic policy via Reconciliation and loan guarantees and quantitative easing if Republicans filibustered and the economy was still in the dumps in 2010 and 2011. To deal with the second, the Obama administration needed to rapidly nominate and get confirmed Federal Reserve governors and a Federal Reserve Chair who would take the Federal Reserve's dual mandate very seriously indeed if unemployment was above 9% and stable or rising in 2010 and 2011.

To deal with (3) and (4) the administration needed to prepare the ground by doing more of what it had done to buy insurance against (1) and (2)--by warning at every opportunity that the first round of expansionary policies 
might not be enough, by preparing the ground via Reconciliation and by husbanding executive branch authority, and by making sure not to abandon the fight against unemployment for the fight for long-run fiscal stability until the recovery was well-established--lest the administration wind up in 2010 and 2011 with a jobless recovery and few remaining tools to expand demand.

To deal with (5), the administration needed to prepare the ground for using Fannie Mae and Freddie Mac to essentially nationalize, refinance, and work out mortgages nationwide, should it turn out in 2010 or 2011 that the recovery was not strong or sustained.

To deal with (6), it would have been wise on day 1 to promote the IMF to the role of global technocratic crisis manager, and to get commitments from major credit-worthy economies that they would back the IMF with sufficient resources for it to actually handle the situation. should the mortgage-induced banking crisis of 2008-9 set off sovereign debt crisis in 2010-11.

I wasn't a genius to see these as the risks. They were, at least in the circles in which I moved, obvious.

Yet the only risk that the Obama administration has appeared to even think about guarding against is (7)--which is the one risk that has not come home to roost big time.

For me the big question since the summer of 2009 has been: Why? Why didn't the Obama administration make any significant effort to purchase insurance against risks (1) through (6)? Those were the questions that I hoped Ron Suskind's book would answer for me.

And, alas, it does not do much to do so. Instead, it falls into the Woodward The Agenda trap: it is a story of strong and colorful personalities knifing each other in internal bureaucratic bar fights, with little sense of what the substantive policy arguments were, of the arguments' merits and demerits, and of the stakes.

Moreover, the book falls victim to the Teddy White disease: a reporter taking the time-colored recollections of 
individuals and turning them into a third-person omniscient capital "T" Truth, giving the narrative an authority it does not deserve.

This is further compounded by Suskind's having the implicit viewpoint of the third-person omniscient narrator jump away from one source to another, sometimes seemingly at random, sometimes when the first source tells a version of the story that Suskind does not want to highlight. This causes errors. References to seventeenth-century muzzle-loading musketry technology become in Suskind's retelling references to twenty-first century pornography. People who steamrolled the entire Democratic coalition to get policy ideas that had their origins in the hard-right Heritage Foundation enacted into law are, in Suskind's view, too weak to stand up to the big boys of the administration. Suskind wrongly thinks people who skip meetings to deal with crises are demonstrating their disloyalty to the president, when Obama would have been the very first to say: "What are you doing here? You need to be firefighting!"

And Tim Geithner dresses badly and will never make the cover of the Financial Times "How to Spend It" supplement.

And so what I at least regard as the big stories and mysteries of economic policymaking under Obama are largely passed by.

In my view, Suskind's greatest achievements in the 2000s came in stories where his third-person omniscient camera followed a single smart, talkative, quirky, and angry individual--John DiIulio, or Paul O'Neill--through the Bush administration. His narratives then acquire a kind of authority as one player's view. And the damage done by the assumption of the third-person omniscient viewpoint is thus limited. But that is not the kind of narrative we have here.

I had hoped to learn from Confidence Men why Federal Reserve Chair Ben Bernanke shifted from being the activist crisis manager and the advocate of aggressive quantitative easing that he was before mid-2009 to a man who does not take the Federal Reserve's dual mandate to focus both on price stability and full employment seriously. And I had hoped to learn why Obama chose to renominate Bernanke Federal Reserve Chair over a candidate--Larry Summers--who had reason to think he was the default choice for the job and who does take that dual mandate seriously. I had hoped to learn why Barack Obama had been appallingly slow at nominating candidates to fill empty slots among the Governors of the Federal Reserve. I learn nothing substantial about any of these.

I had hoped to learn why Tim Geithner had been strangely loathe to engage in large-scale quantitative easing using Treasury resources. Why wasn't the PPIP developed and expanded further? I had hoped to learn why Geithner was loathe to even to set up the game table for the possibility that it might become advisable to use Fannie Mae and Freddie Mac to intervene in the mortgage market on a large scale. People, after all, had been discussing using them as a "in case of emergency break glass" option since at least the Bear Stearns bankruptcy of early 2008. I learn nothing substantial about these.

I had hoped to learn why the Obama administration had not done the natural thing--the thing that I had been told on my first day in the Clinton administration was the right way to do economic policy--and load as much as possible of your core agenda into the streamlined budget Reconciliation process, as a way of evading congressional procedural roadblocks. I learn nothing about this.

I had hoped to learn why the Obama administration kept trying to make deal after deal with a unified Republican caucus that was following the Gingrich playbook that the road to victory in the next election is to make the Democratic President be and appear to be a failure by denying him everything that the press might call a success for the president. I learn nothing about this.

So what do I learn?

I learn that Barack Obama was very worried about the budget deficit and the rising national debt very early--so much so that he short-circuited his own bureaucratic processes and ordered reports from deficit hawk and OMB director Peter Orszag routed to him around the NEC process. And I learn that, perhaps as a consequence, Obama appears never to have registered how far off any possible Treasury bond crisis was. The message Obama needed to hear was, I think, something like:

Analogies between today and the early 1990s, when immediate deficit reduction set off a strong recovery, are likely to be wrong. At the start of the 1990s the 10-year Treasury bond commanded an interest rate of 9%. Today it commands an interest rate of 3%.

As of early 2009, or indeed as of today, a Treasury bond crisis is not one of the ten biggest dangers facing the United States economy.

I do learn that the "do less" or "do no harm" Geithner-Emanuel alliance regularly kneecapped a Romer-Summers "do something" alliance--perhaps because Summers' and Romer's small CEA and NEC staffs could only come up with outlines and proposals rather than plans--which only the Treasury with its ample staff could produce--and, as Geithner liked to say, "plan beats no plan".

Suskind writes that Geithner thought Romer was of "no value on policy issues [of] financial rescue", and that:

Larry and Rahm were the only one's that mattered. Larry's problem was that he had no alternative, ever... never came up with an alternative strategy...

Suskind then quotes Treasury Assistant Secretary Alan Krueger's thoughts on the issue:

Alan Krueger said one reason Treasury dragged its feet on constructing a plan for Citigroup's resolution was Sheila Bair. They would have had to consult the FDIC chairwoman... her agency is in the business of closing banks. "The fear was that Sheila would leak it... there'd be a run on Citi." He added that this was one of many reasons:

The bottom line is that Tim and others felt the president didn't fully understand the complexities of the issue, or simply that they were right and he was wrong, and that trying to resolve Citi and then other banks would have been disastrous.

Krueger, for one, disagreed...

I think that Alan Krueger is wrong here. First, in the early stages of any Democratic administration, the Treasury is overwhelmed with work. Assignments coming in are regularly dropped on the floor. Only the most immediate priorities of the Treasury Secretary get pushed through the bureaucracy. This was the case in 1993 when Treasury Secretary Lloyd Bentsen had a full mesnie of confirmed assistant and undersecretaries to deploy. This was more the case in 2009 when Tim Geithner had no confirmed deputies at all. 
Second, Tim Geithner had, when he was President of the Federal Reserve Bank of New York, tried to get tough on the banks. That was what the Lehman Brothers bankruptcy was. It backfired, catastrophically. After that experience, Geithner was bound to seek policies that would restore confidence, recapitalize the banking system, and halt the panic without frightening or angering bankers. From his perspective the risks involved in trying to get tough on banks were so great that such policies were, if not unthinkable, simply not a high priority. Had Obama wished a Treasury Secretary enthusiastic enough about being tough on banks and bankers to push plans for doing so through the bureaucracy, he needed to have chosen another and very different Treasury Secretary.

I learn that Barack Obama was attracted to the idea that on top of our business-cycle demand-driven downturn was a longer-run trend rise in technological unemployment that virtually guaranteed that the recovery would be "jobless":

[Summers and Romer] were concerned by something the president had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy. Summers and Romer were startled. "What was driving unemployment was clearly deficient aggregate demand," Romer said. "We wondered where this could have been coming from. We both tried to convince him otherwise. He wouldn't budge." Summers had been focused intently on how to spur demand, and on what might drive a meaningful recovery.... [W]ithout a rise in demand, in Summers's view, nothing else would work.... But productivity?... If Obama felt that 10 percent unemployment was the product of sound, productivity-driven decisions by American business, then short-term government measures to spur hiring were not only futile but unwise. The two economists strained their memory... had they said something he'd misconstrued?... After a month, frustration turned to resignation. "The president seems to have developed his own view," Romer said.

And I learn that the team of Orszag-Obama starting from this position effectively kneecapped proposals for follow-on expansionary policies to boost employment in late 2009 and early 2010, letting the best be the enemy of the good.

Orszag countered [in November 2009] that unless they did something large... $700 billion, "it wouldn't jump-start or significantly move the economy"; but $700 billion was politically untenable.... Romer said this was the wrong approach.... $100 billion would mean one million new jobs. "A million people is a lot of people." Obama was unenthusiastic. Romer, in meeting after meeting, came back with new plans, new ways either to locate $100 billion or to pitch it to Congress. Her appeals were passionate. She said they were falling into a "the perfect is the enemy of the good" trap.... In November.... [Obama] took Orszag's position at a briefing.... "That is oh so wrong," Romer blurted out.... "It's not just wrong, it's oh so wrong?" Obama queried.... "Enough!" he shouted. "I said it before, I'll say it again. It's not going to happen. We can't go back to Congress again. We just can't!"... Romer, visibly shaken... was summoned to talk privately in Jarrett's office....

A few weeks later... Summers stepped up, offering, almost word for word, the position Romer had voiced previously. This time Obama listened respectfully: "I know you've got to make this argument, Larry, but I just don't think we can do it." As they left the meeting, Romer... said, "Larry, I don't think I've ever liked you so much." "Don't worry, [Summers] quipped. "I'm sure the feeling will pass..."

Now I know that one major reason why Orszag at least was insufficiently panicked about the unemployment situation in late 2009 was that he was still confident that the U.S. economy was about to undergo a rapid recovery--that we would see a "V" rather than the "L" that we are currently suffering through. If you have high confidence that a "V" is on the way, then it indeed makes little sense to devote limited presidential time and limited administration bandwidth to lobbying for a $100 billion fiscal expansion. If a bill producing such shows up on the president's desk, of course the president should sign it--but from Orszag's perspective it was not worth spending energy. I thought at the time that Orszag and Obama were wrong. But Suskind does not help me understand why Orszag and Obama were so confident that the "V" was coming--he doesn't even hint that they had an argument.

And, as Ezra Klein points out, the stories Suskind does tell repeatedly undermine his global narrative claim that the administration's big problem was that Lawrence Summers was (a) too sure of himself, and (b) so good a debater that he won internal arguments he ought to have lost. If Larry Summers had been winning all the internal policy arguments, Ezra points out, then administration policy would have gone in "the direction Suskind clearly wishes the White House had gone."

I learn that, somehow, Tim Geithner managed to kneecap Barack Obama's initial enthusiasm for Elizabeth Warren's consumer financial protection agenda as a major administration initiative. Obama started out impressed with Warren. Suskind writes that Obama:

... was particularly taken with Elizabeth Warren.... "Wow, she's really something," he said.... "Really good, we should get her out there more often." Larry Summers and Anita Dunn... discussed for a moment how to get Warren more TV.... Alan Krueger smiled to himself. It was good Geithner wasn't present. He despised the crusading Warren...

And lots of people respected and approved of Warren--including, eventually, Christina Romer:

Warren was caught off guard by Romer's intensity, and her thoughtfulness.... Question after question, the two engaged in an intellectual thrust-and-parry, until finally... Romer broke her stride. "Why is it always the women?" Romer said. "Why are we the only ones with balls around here?" That night Warren got a call from Valerie Jarrett. "Wow, you really turned Christy Romer around."

But Obama would not appoint her to the agency whose creation she had worked so hard for:

August 13 [2010], Warren finally got her meeting with the president.... The president offered a long explanation of the complex logistics whereby Warren would stand up the agency and become a special advisor... that way she wouldn't spend months... on ice...

I think I understand why Geithner viewed Warren's potential appointment as too dangerous--the shadow of Lehman Brothers again, and Geithner's judgment that the catastrophic reaction to not bailing out the creditors of Lehman Brothers was a powerful wakeup call on the costs of "tough on bankers" policies. But a reader of Suskind would not learn anything about Geithner's reasons, other than Suskind's claim that Geithner--who has so far never worked for a Wall Street firm for a day in his life, and who was one of the three who pulled the plug on Lehman--is a tool of Wall Street.

Ex ante, I would have given long odds that Ben Bernanke would not forget about the Federal Reserve's dual mandate. Ex ante, I would have bet long odds that Tim Geithner would not have turned into "Dr. No" in a situation as desperate as the one the Obama administration has faced. Ex ante, I would have given long odds that even if Geithner had started 2009 much too optimistic that he would have quickly marked his beliefs to market. Ex ante, I would have given long odds that Summers would have wiped the floor with Orszag and Geithner were the collegiality of the NEC process to break down and turn into out-and-out bureaucratic war.

Why Obama chose the policies he did, why Geithner and Orszag and company were so optimistic in 2009, why the Reconciliation process was not teed up for emergency expansionary fiscal policy action if it turned out to be necessary, why Fannie and Freddie were not teed up for emergency mortgage action if it turned out to be necessary, why the administration turned so decisively away from unemployment and toward long-term deficit reduction in early 2010, why Summers and Romer did not wipe the floor with Geithner and Orszag in the long twilight bureaucratic struggle when NEC collegiality broke down, and why Bernanke forgot about the employment and output part of the Federal Reserve's dual mandate - these are all questions that I would dearly love to know the answers to.

Two and a half years ago I would have given long odds that Ron Suskind's book would provide me with a lot of the answers to these questions.

It does not.