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What The Rubinites Didn't Get About 2008

In his new book, The Escape Artists, my TNR colleague Noam Scheiber makes the interesting argument that one problem with President Obama's economic team was that, in struggling to pull the U.S. economy out of recession, the Rubinites (i.e., Tim Geithner and Larry Summers) were fighting the last war.

What the financial crises of the late 1990s taught Geithner, Summers, and other members of Treasury Secretary Robert Rubin's economic team, Scheiber argues, was to embrace the Powell doctrine. Just as Colin Powell had argued that the U.S. military should only fight wars where you can quickly defeat the enemy with "overwhelming force," so Rubin, Summers, and Geithner came to believe that the way you calmed tottering markets was with a massive infusion of cash into a troubled banking system coupled with the imposition on the country in question of strict market reforms. The latter could have devastating effects on that country's short-term economic well-being, but the overriding concern was to keep global markets from collapsing.

Scheiber uses the South Korea crisis of 1997 as an example. Rubin and Co. got the International Monetary Fund and the World Bank to commit to a $55 billion bailout. In return, the South Koreans had to raise interest rates to 25 percent to keep foreign capital coming in and break up their ludicrously inefficient conglomerates. The result was that South Korea's unemployment rate went from 2.5 percent to 7 percent. The upshot was that bankers got rescued and workers got screwed, but the bankers were all over the world and the workers were just in one country. "It was hard to argue with the results," Scheiber writes. "The world held together."

You see where this is going. In the 2008 banking crisis, Geithner and Summers applied the same strategy--Geithner, Scheiber writes, saw no great need for a stimulus bill once the banks had been rescued--with the result that unemployment became a secondary concern. (In this instance the needed market reforms involved the same banks that were being rescued, and were imposed not from without but from within. The result was the relatively mild Dodd-Frank financial reform bill.)

"The problem," Scheiber writes,

was that when you crossed out "Korean unemployment" and wrote in "U.S. unemployment" the difference between 6 or 8 or 10 percent wasn't chump change alongside the greater good of global financial peace. It could be the difference between whether your boss, the president, survived or was tossed out on his ear.

As things turned out, the Republicans ended up with a front-runner for the presidential nomination so weak that he almost lost a primary in the state where he grew up (and where his father was once governor). The GOP has overplayed its hand in Congress, and in general has been working overtime to frighten independents by taking extremist positions. In addition, recent indicators suggest the economy is finally limping back to life. So the smart money right now is on Obama's reelection. Still, Scheiber's point is a good one.

A larger question--one for another day--is why global markets find themselves on the verge of worldwide collapse with such alarming frequency. Er, that's not good, right?