One point that I think is worth making as we ponder the turnover in the Obama economic team is that to an extent you can’t just “replace” people by looking at their job titles. According to Ezra Klein “The early word is that Obama would like a CEO and a woman, and there are rumors about former Xerox CEO Amy Mulcahy.” That’s a bit silly if you ask me, but the larger issue is that influence in a White House staff job comes from the President deciding he wants to listen to what you have to say so if Summers was wielding a lot of influence you can’t “replace” that influence by bringing in someone from the outside who the President doesn’t know and who was picked because his political team thought it would “look better” to bring in a woman CEO.

Obviously it’s possible that over time someone like that could gain the President’s confidence and become a trusted advisor. After all, it’s not as if Summers and Obama had some incredibly long history together. But at a first blush the President is going to listen to people who he put in jobs because he wanted to hear what they had to say over people who he put in jobs because he mistaken thought that appointing a CEO to a job would induce rich businessmen to stop complaining that the government ought to cater more to the interests of rich businessmen. It’s worth paying attention to Sheryl Gay Stolberg’s account of Summers’ influence:

After Mr. Obama was elected, he persuaded Mr. Summers — who had served as Treasury secretary for Mr. Clinton — to take the lower-profile job of running the National Economic Council, a job that some thought might be beneath him.

He greatly expanded the role by establishing the daily economics briefing, which he controlled and ran. Early on, he ruffled feathers, disagreeing with Mr. Geithner — to whom he had been a mentor — and Ms. Romer, although those differences seemed to abate over time. There was also widespread speculation that he wanted to be chairman of the Federal Reserve, a job he did not get when Mr. Obama reappointed Ben S. Bernanke.

Which is just to say that Summers’ influence came from his personal stature and from a reshaping of the role of the office he held. If it’s the case, as you sometimes hear, that Summers was the most influential member of the team then his “real” replacement in that role is likely to be Timothy Geithner or Austan Goolsbee rather than someone brought in from the outside for odd reasons.

Last, it’s worth saying that in retrospect the decision to stick with Bernanke over Summers at the Fed doesn’t look very good. The Bernanke Fed turned much less aggressive in fighting the recession than it should have been once he was reappointed, Bernanke’s status as a conservative Republican has bought zero political cover for the administration to do anything, and one of the prominent explanations given at the time was that sticking with Bernanke “helped assuage fears in financial markets that a chairman closer to Obama might boost the economy in the short-run at the expense of high inflation” which in retrospect was totally counterproductive. A chairman tied to the administration who was seen as likely to be willing to boost the price level to soak up excess capacity is exactly that the country has needed for the past year and could use going forward.

Tim Fernholz writes about Lawrence Summers’ evolving economic views:

While this is all true, there is a sense that Summers’ views shifted as well. Many observers point to the op-ed columns that Summers wrote for the Financial Times in 2007 and 2008, which presented a more progressive vision of the economy than he had previously articulated. In one from June 2008, after Bear Stearns collapsed, he noted that “self-regulation is deregulation” — a shift from his previous position on derivatives — and called for a new regulatory regime that would end the problem of “too big to fail” by liquidating failing banks.

“One mistake that progressives have made is to not recognize how much the ground has shifted towards progressives in the last 10 years,” Lawrence Mishel, director of the progressive Economic Policy Institute says. “Larry has moved along with the center-left.”

Consider the idea that our long-term deficit problem is one of health-care cost, not entitlement spending. The concept originated among progressives but is now championed by Summers. He was also a strong advocate of rescuing General Motors and Chrysler, an economic necessity that called for productive government intervention in the economy. Geithner and Summers also clashed over dealing with insolvent financial institutions last spring, with Summers advocating that institutions revealed to be insolvent should face harsher consequences; Obama deferred to his treasury secretary.

Fernholz links some of this, rightly in my view, to the fact that Summers is more of a “political” animal than the top Treasury officials are. The impression I get is that Secretary Geithner and his policy advisors didn’t fully grasp the fact that economic crisis-management was something of an iterated game between technocrats and politicians in which one set of actions could create political constraints that foreclosed future options. Consequently, even though the measures taken during the winter of 2008-9 have largely succeeded, they’ve also created a political context in which it’s hard to do anything else. A more punitive, more populist approach back then would have had some downsides, but it might have left the door wider open for measures to deal with the situation we’re now facing.

I’d been coming around to the view that the PPIP plan, whatever its shortcomings, is really about the best we could do. This business about banks possibly just swapping toxic assets and proclaiming them now valuable, however, is really distressing. As Felix Salmon says:

Looked at this way, the combination of letting banks bid on each others’ toxic assets, along with the weakening of mark-to-market rules, will serve to maximize opacity, minimize the chances that insolvent banks will be revealed as such, and render the government’s stress tests an exercise in rubber-stamping utterly unrealistic balance sheets. The risks of a Japan-style lost decade seem higher than ever.

Meanwhile, this look at Larry Summers’ multi-million dollar income mostly derived from financial firms in exchange for vaguely defined services is once again a reminder that the people running our policy have a level of personal ties to and affinity for the world of big finance that the rest of us lack.

A colleague offers us Stephen Labaton’s November 5, 1999 New York Times article “Congress Passes Wide-Ranging Law Easing Bank Laws”:

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. “This historic legislation will better enable American companies to compete in the new economy.” [...]

“I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930′s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. “I wasn’t around during the 1930′s or the debate over Glass-Steagall. But I was here in the early 1980′s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

I think it’s pretty clear, when you look at it in detail, that you can’t really point to the current situation and say “aha! if only Glass-Steagall were on the books this wouldn’t have happened!” That’s not at all clear. Among other things, by this time Glass-Steagall was already a bit of a dead letter thanks to a series of successive administrations who didn’t really believe in its spirit.

That said, the debate over the spirit of the laws was an important one. Summers and Dorgan weren’t just talking about a technical issue of bank regulation, they were talking about contrasting philosophical approaches. To Summers, Depression-era regulations were outdated, and reflected a no-longer-needed sense of panic and populist outrage. Modern-day knowledge of the financial system, both inside banks and inside policy circles, meant that we didn’t need to have those kind of fears of a panic that we wouldn’t be able to deal with. Meanwhile, hobbling financial institutions with crude regulatory barriers was likely to real harm. It was important to “better enable American companies to compete in the new economy.” Dorgan, by contrast, saw the world more through the lens of uncertainty. Previous bouts of financial deregulation had led to problems. And the post-Depression banking system had proven compatible with decades of economic growth. To throw caution to the wind on the assumption that the problems of the past wouldn’t re-arise seemed like hubris.

Needless to say, we’re only a few years into the 21st century and the “rules for the 21st century” don’t seem to have worked very well. In retrospect, it’s not entirely clear what the benefits of allowing the creation of extremely large financial conglomerates was. For a while, they appeared to be powering economic growth, but in retrospect a lot of the profits associated with big-time finance seem to have been illusory. But the problems associated with this approach seem real enough.

Larry Summers is not a great orator or even a competent one. But he gave a speech today at Brookings that I thought made a lot of good points. For example, this one about why the impulse to try to solve problems by re-inflating bubbles is wrongheaded:

We have seen housing prices reach unsustainably high levels and credit spreads reach unsustainably low levels in the middle of this decade. And we saw bubbles in technology in the late 1990s.

Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble’s excesses and those who did not. And, it is not entirely healthy even while it lasts. Between 2000 and 2007 – a period of solid aggregate economic growth – the typical working-age household saw their income decline by nearly $2000. The decline in middle-class incomes even as the incomes of the top 1% skyrocketed has a number of causes, but one of them is surely rising asset prices and the fact that financial sector profits exploded to the point to where they represented 40% of all corporate profits in 2006.

Confidence today will be enhanced if we put measures in place that assure that the coming expansion will be more sustainable and fair in the distribution of benefits than its predecessor. That is why the President has priorities that go beyond the immediate goal of containing the downturn and promoting recovery.

One of the things you see is that the voice of the top 1 percent usually speaks with orders of magnitude more volume in politics, and even more volume than that in the media, but sound policy requires you to keep it all in perspective.

There’s always reason to be a bit skeptical of election year calls for economic stimulus packages from congress, but Lawrence Summers is a bigger deficit hawk than I and says it’s a good idea:

“I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.

That comes via Brad DeLong who also agrees. Now of course the problem that enters the picture is that the most effective kind of stimulus is the kind that puts spending power in the hands of the sort of low-income individuals who have a high propensity to spend the money. But conservatives, though happy to spend vast sums of money on all kinds of things, remain rigidly opposed to spending money on programs to help poor people. Thus, given the filibuster rule, it’s extremely difficult to pass a sensible stimulus package. On the other hand, successful stimulus would do a lot to help the electoral fortunes of conservative politicians, so there’s at least some chance the right’s leaders will put self-interest ahead of fanatical loathing of assistance to low income people.