Sunday, July 12, 2009

Summers: The Worst Is Yet to Come

President Obama's top economic adviser, Larry Summers, appears to be turning a bit more negative on the economy. Does he understand that Fed chairman Ben Bernanke is tightening the screws on the economy, again, with slowed money growth? Who really knows? But, I think he is spooked by something.

In April I attended an event sponsored by the Economic Club of Washington, where Summers was questioned by Carlyle Group's David Rubenstein. I reported:
"There has been a substantial anecdotal flow over the last six to eight weeks of things that felt a little bit better," President Barack Obama's National Economic Council head Larry Summers told the Economic Club of Washington. "The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall ... we can be reasonably confident that that is going to end within the next few months and we will no longer have that sense of a free-fall."

In a recent interview with FT's Chrystia Freeland, Summers sounds more cautious:
Onward, then, to the toughest economic challenge Summers faces today: the recession. Here, Summers turns sombre: “I don’t think the worst is over ... It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low. What does appear to be true is that the sense of panic in the markets and free fall in the economy has subsided and one does not have the sense of a situation as out of control as a few months ago.”

While it could be argued that Summers has not changed his view that the panic phase of the economic crisis is over, but that there are still problems in the economy, Summers seems to be focusing and emphasising further problems in the economy at this time, rather than highlighting the end of free fall. Further, his comment that "the worst is not over" appears to be a much more harsh judgement about the near future then what he was emphasising in April.

From there, Summers went on to tell the Big Lie. With no Austrian business cycle theorist anywhere near the White House, Summers told FT:
My role is to make sure the president gets access to the best economic thinking he can on everything that touches the economy...That means making sure that no arguments go unscrutinised ...

FT, curiously, while seeming to touch on every highlight of Summers' career, failed to ask Summers' about his silent partnership, before joining the White House, with Dr. Doom, Nouriel Roubini.

FT did report that Summers had weekend plans to play tennis. There is no report as to who he will be playing tennis with. In April, Rubenstein made clear that he was an occasional tennis player against Summers.

FT closed with a question to Summers about the possibility of his becoming Fed chairman. In the exchange, there wasn't anything close to an endorsement of the job Bernanke is doing:
...Washington rumour has it that the NEC isn’t big enough for Summers and that he regrets not leading the Treasury and yearns to run the Federal Reserve. Does he?

“I am totally engaged by the breadth of issues that I am asked to think about to support the president.”

I push one more time: “Even for you, that’s enough?”

“That’s more than enough.”


  1. Next big shoe to drop, CIT Group?

  2. From Bloomberg:

    The bid-ask spread on credit-default swaps in the Markit CDX North American Investment-Grade Index widened to 9.73 basis points yesterday, about 60 percent higher than the week before Lehman filed for bankruptcy and about 169 percent more than two years ago, according to CMA DataVision. The spread soared to a high of 22 basis points on Oct. 13.

    The index is a benchmark for the cost of protecting bonds against default linked to 125 companies in the U.S. and Canada.

  3. A day trader friend sent this to me. It's well worth the read in light of the stories you've done on GS and their computerized program trading: