Guest Post: Larry Summers Is Like a Guy Who Yells That the Sun Really DOES Revolve Around the Earth and that the Current Orbit is Just a Temporary Aberration . . . and That If We Just Wait a Little While, “Everything Will Return to Normal”

Two leading White House economic advisors – Larry Summers and Christina Romer – are giving very different views on the economy.

As Fox news summarizes:

“Everybody agrees that the recession is over,” said Larry Summers, director of the National Economic Council.

“Of course not,” countered Council of Economic Advisers Chairwoman Christina Romer in a separate interview when asked if the recession is a thing of the past …

Romer appeared to be more politically sensitive to [the high unemployment rate], reflecting Obama’s recent statement that he won’t rest until all Americans who are looking for work can find jobs again.

Based on the “official definition,” the economy has, “at least in terms of GDP, reached that point” where the recession has ended, she said. But given high unemployment which could go even higher, Romer offered a different response when asked if the recession was over “in your mind.”…

Summers appeared to cite such forecasts in explaining the stages of economic recovery. He referenced the fact that unemployment dropped from 10.2 percent to 10 percent last month and predicted more solid trends toward recovery next year.

“Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be,” he said on ABC’s “This Week.” “These things happen in stages. First, GDP goes up. That has happened. Then, hours that are worked by workers who already have jobs go up. That’s starting to happen. Then employment goes up. We got very close to that this year, this month, with only 11,000 jobs lost. And then unemployment starts to come down. So these problems weren’t made in a month or a year, and they are going to take a substantial time to solve.

At first glance, Summers’ argument sounds convincing … GDP has been growing, and jobs lag the general economy.

However, as Paul Volcker explained to Spiegel this weekend, the growth in GDP is an illusion. Specifically, the economy is actually shrinking, and the only growth is from what the Fed has poured into the economy:

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

Moreover, Romer is right that unemployment might increase. Indeed, Summers has created a rising tide of unemployment in America which threatens to stall any lasting economic recovery for a while.

Indeed, many leading economists believe that America has permanently lost jobs under Summers’ watch.

Summers is out of touch with reality. He lost billions at Harvard due to his blindness about the riskiness of derivatives.

As I wrote in February:

Summers is the guy responsible for:

Allowing the banks to carry extraordinary levels of debt, thirty-to-one fractional reserve banking margins

Ensuring that derivatives were not regulated, and that AIG could operate as a giant hedge fund

Repealing New Deal era legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming “too big to fail”

As a 1999 New York Times article entitled “Congress Passes Wide-Ranging Bill Easing Bank Laws” quotes Summers as saying:

”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.”

As I pointed out in April:

On Friday, Summers basically said we should continue to do the exact same things which got us into this mess because:

All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.

Um . . . sorry to break it to you there Larry, but a group of economics professors has recently demolished the “self-equilibrating economy” theory:

If one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. …The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. …

The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena … This tradition, however, has been neglected …

And when economist James Galbraith spoke at a recent panel on the causes of the financial crisis, the first thing he listed as the main cause of the crisis was “The idea that capitalism … is inherently self-stabilizing” …

Summers [is] like a guy swearing that the Sun really does revolve around the Earth and that the current orbit is just a temporary aberration . . . and that if we just wait a little while, “everything will return to normal”.

As I pointed out in September, Summers has totally misunderstood the multiplier effect.

He must be replaced with someone whose allegiance is to America as a whole, and not solely Wall Street.

As Congressman DeFazio put it:

[Obama] is being failed by his ec[onomic team ... We may have to sacrifice just two more jobs [Summers and Geithner] to get millions back for Americans.