Summers a smart choice
The former treasury secretary was one step ahead of the Bush administration in prescribing solutions to the financial crisis.
WASHINGTON (Fortune) -- Say what you will about Lawrence Henry Summers, who now commands President-elect Obama's attention as his top White House economic adviser. Summers can be abrasive and abrupt. As president of Harvard University, he was socially tone deaf enough to land himself in hot water with women, environmentalists and the civil rights crowd - all in the space of just five years. Already a feminist group is threatening to make life difficult for Summers.
But in choosing to keep the 53-year-old economist close to his side, Obama made the calculation that he needs this centrist voice to calm markets - and he needs a counselor with Summers' proven ability to sense economic dangers lurking around the corner.
At Monday's press conference, Obama called Summers, appointed director of his National Economic Council, "one of the great economic minds of our times....His thinking, writing and speaking have set the terms of debate." The President-elect added that he plans to "rely heavily on his advice as we navigate the uncharted waters of this economic crisis."
During his years at the Clinton Treasury Department - where began his tenure as Undersecretary of International Affairs - Summers, together with his then-underling Timothy Geithner - was forced to "navigate the uncharted waters" of an economic crisis rolling through Asia.
But less obvious moments reveal some of Summers' foresight into today's economic implosion that impressed the President-elect. In 1999, then-Treasury Secretary Summers and his team took the impolitic - and highly prescient - position that Fannie Mae and Freddie Mac should be reined in and subjected to more stringent capital requirements and oversight.
The political blowback was fierce, with lobbyists, backed by powerful lawmakers, accusing his undersecretary of promoting a "tax on homeownership." Today, those systemic risks Summers warned about haunt our economy, while both behemoths shoulder blame for fostering a housing bubble that popped.
Summers joined the Obama economic team last summer, shortly after Hillary Clinton bowed out of the Democratic primary race, and became an early voice arguing for a major fiscal stimulus. At a time when unemployment was still shy of 6%, Summers warned that the economy was at a dangerous moment and that a plan more ambitious than tax rebates and extending unemployment benefits was needed to prevent it from nose-diving.
Pushing an idea now being widely embraced, Summers called for "carefully designed" (read non-pork barrel) infrastructure investment. "With construction employment in free fall, there will be a need for stimulus tied to the needs of less educated male workers for quite some time," he wrote in a Financial Times op-ed piece.
And in July, seven weeks before Treasury Secretary Henry Paulson came to Capitol Hill pleading for passage of what we now know as TARP (Troubled Assets Relief Program), Summers argued for a similar mechanism to purchase assets from stressed banks. More importantly, Summers said that buying troubled assets was only a first step - and would probably need to be augmented to include capital injections for ailing financial institutions.
"In the absence of any framework for the government infusing capital, there is the danger that liabilities will simply be guaranteed de facto or de jure with no other change made, creating serious problems down the road," Summers wrote. "Delay is very tempting, but it can also be enormously costly." But delay on a capital injection is what happened, until Secretary Paulson abruptly shifted the focus of his own rescue efforts.
Of course, Summers hasn't been at the helm during the government's various high-wire attempts to rescue the financial markets. And as treasury secretary, while he fretted publicly about the "systemic risks" posed by Fannie and Freddie, he never made reform happen.
Summers' appointment, alongside that of Geithner at Treasury, marks a continued centrist path for the President-elect, and promises that an Obama White House will be the target of incoming fire from both ends of the political spectrum. If Summers wants to limit the future role of Fannie Mae and Freddie Mac - both now under government conservatorship-- he'll have to battle liberal-left affordable housing lobbyists and their powerful Democratic advocates like House Financial Services Committee Chair Barney Frank.
"Larry Summers has concerns over both" Fannie and Freddie, Obama economic adviser Jared Bernstein told Fortune in a recent interview, adding, "It's inconceivable to me that Fannie Mae and Freddie Mac would get back to this basic moral hazard machine that they were."
At the same time, Summers - who will be the lead architect of any stimulus plan - will also face fire from the political center and conservatives, especially as reports surface of an Obama stimulus plan that could cost as much as $700 billion over the next two years. At Monday's press conference, the President-elect insisted that there is a consensus between liberal and conservative economists that "we need a big stimulus package that will jolt the economy back into shape."
While it's true some conservative economists back large-scale infrastructure programs - former McCain adviser Kevin Hassett tells me that building roads and bridges to speed commerce very likely will help the economy - plenty of other free-marketers vigorously oppose more spending. House GOP leader John Boehner - who favors deep tax cuts rather than government spending - on Monday accused the Democrats of trying to "outbid each other" on federal spending. A stimulus package, no matter what the size, will face some fierce opposition from a bailout-weary Congress.
But Obama's appointments today suggest an astute political start: He has put Summers - a centrist already being attacked by leftist bloggers - in charge of a public works program certain to be embraced by the left. The markets, which rallied Monday despite talk of massive federal spending, may be making a similar compromise calculation.
"The market said we want centrists we can deal with and he gave them that," says David Smick, editor of International Economy magazine and author of the book The World is Curved. "My guess is that the payback is more running room on public works projects."