Multiple Sources Report Bernanke in Doubt

Will Next Week See A Sunday Night Massacre For Obama’s Economic Team? Posted by MIKKEL FISHMAN, Economics Editor in Economy, Featured Articles.
Jan 22nd, 2010 | View commentsComments

Ever since the beginning days of his Administration, Obama has had an official economic team led by Treasury Secretary Geithner/Advisor Larry Summers and an unofficial economic advisory team led by Paul Volcker. Geithner/Summers are pro-financial consolidation and believe the government should spend its efforts into keeping asset prices up and liquidity cheap, and the real economy will follow. By contrast Volcker et al. view Too Big To Fail as a large part of the problem, that the financial industry has grown to the point where it is an unofficial “tax” on the real economy and that job/foreclosure policies should take precedent over asset values. Every compelling commentator I’ve read sides strongly with Volcker and against Geithner, and that applies across the ideological spectrum (there is large agreement about breaking up the banks/removing supports but disagreement about what to do then).

I’ve always had the suspicion that Obama selected his economic team based on the “you broke it you fix it” policy and created the unofficial advisory council in case he decided to radically switch directions at a given point in the future. This made a lot of sense politically speaking: last spring we very well would have entered a rapid Depression without the steps that were taken, but in the long term we are still in a Depression. That Depression may still reveal itself similar to the Great Depression (my bet) or merely similar to Japan’s now two decade long stagnation (increasingly the consensus view) which in my opinion would lead to a catastrophe of Sisyphean proportions.

In either case, Obama — for better and for worse — has rather effectively pursued status quo economic policy and wrapped it around the necks of Geithner/Summers and Bernanke. Now that it is becoming increasingly clear that our recovery is almost entirely illusionary (even with the effects of the stimulus, which is going to have smaller contributions going forward) and there is a strong possibility that we will enter recession again by the middle of the year, it appears that Obama is laying the groundwork to pivot to the Volcker view.

Whether it is the bank tax on uncovered assets or the proposed mini-Glass Steagall (dubbed the Volcker Rule) there finally is a growing pushback against Too Big To Fail. And that couldn’t make Volcker happier. Based on how Geithner is reacting, he too seems to think there is writing on the wall which is drawing fire from some increasingly prominent quarters such as Simon Johnson, former chief IMF economist and author of the great Atlantic article last May entitled “The Quiet Coup.” Considering how explicit Obama was in his language, this is probably not a bad guess.

Did I forget to mention that Bernanke’s term expires at the end of the month and he still hasn’t been reconfirmed by the Senate? Simon Johnson even wants the Senate to put him back in the hot seat, in light of Obama’s new proposals.

In light of this, I will partake in some gross and rank speculation. Bernanke will fail to be reconfirmed by the Senate, and on February 1st Obama will announce that Geithner and Summers resigned the night before, thank them for their service and then unveil new Fed Chair and Treasury appointees, in addition to bringing the rest of his unofficial advisory team into official positions. By the end of the week he’ll hold a press conference announcing a new jobs proposal and start attacking “Congress” as being ineffectual in general.

Update: We might not get to next Sunday as the floodgates have started to open with Sen. Boxer and Sen. Feingold coming out against Bernanke as well. That means that senators that normally represent the organizational base from both parties have now come out publicly against the confirmation.

Also, if you’re religious you may want to start praying, as Barney Frank has apparently come out against GSEs. Rep. Frank has long been the poster child for cronyist connects to Fannie/Freddie and if this stance turns out to be legitimate then it is very surprising. However it is another data point for my prediction that the Administration is going to move away from largescale asset support and start making bondholders take losses.

Update 2: Barry Ritholtz has a great chart showing how insane the last 15 years has been when it comes to the stock market.