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The fly in the ointment

The fly in the ointment of Obama's economic rescue plan is Larry Summers, the head of his economics team. Summers' idea to revive the economy seems to be that if he gives enough to the bankers, some of it will probably slop over to help the rest of the system.

Ironically, Summers was an enthusiastic supporter of most of the Bush/Greenspan laissez-faire (let business alone) policies that led to the big problem in the first place. Now he is hired to fix it. He was an enthusiastic supporter of the Gramm-Leach-Bliley Act of 1989 that turned everyday business banking into the more risky investment banking, that financed the real estate boom and over-supply of housing that will be a drag on the market for years.

And on the financial side he opposed regulation and control of derivatives.

Derivatives can provide a legitimate and useful protection to banks for the ups and downs of the market. But since they provide a profit on each transaction, the booming economy of the 2000s invited lots of transactions. Banks sought ways to make them more attractive. Accordingly, they were morphed into the exotic credit default swaps that skyrocketed to tens of trillions of dollars worldwide and the eventual crisis.

So Summers unreservedly approved the Bush/Greenspan policies before the crash, but these were not the only clues to his economic intentions.

His general approach is clearly revealed in his almost worshipful obituary (see the Nov. 19, 2006 New York Times) for Milton Friedman, the high priest of laissez faire. Friedman was the heart and soul of the Chicago school. It was this movement that inspired the dismantlement of the regulatory and distributive structure that helped to correct some of the worst abuses of laissez faire before the depression and led to the massive redistribution of income toward the top over the past 20 years.

Summers put Friedman in the same class as Keynes as one of the two most influential economists of the 20th century. The paradox is that he may be right as far as influence is concerned. The difference is that Keynes' influence was constructive by defining the role of government. Friedman's contribution was his movement discussed above, that took society in the wrong direction.

Summers actually, and this was not tongue in cheek, entitled his obituary "The Great Liberator."

He says (presumably with a straight face), "No contemporary economist anywhere on the political spectrum combined Mr. Friedman's commitment to clarity of thought and argument, to scientifically examining evidence and to identifying policies that will make societies function better." Such a statement defies rational understanding.

What is utterly mystifying is why Obama would appoint someone at the opposite end of the political spectrum to head such an all-important position. Summers' whole economic philosophy, spelled out in word and deed, is contrary to all that Obama claims to stand for.

Harry Cook is a retired professor of economics. He taught at Southern Oregon University from 1966 to 1986.