November 13, 2013
In an interesting column discussing the splits on economic issues in the Democratic Party and how they affect Hillary Clinton’s prospects for 2016, Harold Meyerson noted progressives opposition to Larry Summers as Fed chair. He told readers:
“To the liberals, Summers’s sin was his central role in deregulating derivatives when he served as Bill Clinton’s Treasury secretary as well as his support for repealing the Glass-Steagall Act, a change that allowed previously safe depositor banks to use those funds for speculative investments.”
Actually the negative impact of the soaring dollar, which was a direct result of the bailout from the East Asian financial crisis that Summers helped engineer, dwarfed the impact of deregulating derivatives and repealing Glass-Steagall. The harsh terms of the bailout led countries throughout the developing world to begin a massive accumulation of dollar reserves to avoid ever being in the same situation.
The resulting trade deficit created an enormous hole in demand in the economy. This hole was filled by demand generated by the stock bubble in the 1990s. When that bubble burst it gave the U.S. economy the longest period without job growth since the Great Depression. The economy only started creating jobs again when the housing bubble picked up steam and filled the demand gap created by the trade deficit.
While the decline in the dollar since 2002 has partially closed the trade deficit, it is still creating a demand gap of more than $500 billion a year. Absent another bubble, this gap can only be filled by large budget deficits. Since almost no one in a position of responsibility in Washington is prepared to advocate larger deficits, this means that Summers high dollar policy is likely to condemn the country to high rates of unemployment long into the future.
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