Official White House Photo by Pete Souza
Obama advisers on the eve of General Motors filing for bankruptcy, May 31, 2009
As the economy continues its fitful recovery, complicated by supply bottlenecks that temporarily raise some prices, we are likely to hear more calls for the Fed to tighten money and for the Biden administration to pull back on public investments. You’d expect this from partisan Republicans. Even worse are the Wall Street Democrats.
Exhibit A is Larry Summers. Exhibit B is Steven Rattner.
Rattner is the quintessential Wall Street Democrat. He runs a private finance company, is personally worth at least hundreds of millions, and effortlessly mixes his roles as financier, influence broker, and commentator, as a contributing opinion columnist to The New York Times. A recent oped by Rattner displays the Wall Street case for more austerity and less growth. The essay is worth unpacking, argument by argument.
First, Rattner invokes escalating housing prices, and blames the Fed’s policy of low interest rates. (The oped is titled: “The Housing Market is on Fire. It Doesn’t Need More Fuel.”)
Let’s see, what are the deeper reasons for why housing is so unaffordable? First, we subsidize the wrong end of the housing market with tax breaks that increase with the value of the house. We spend pitifully little on affordable housing, both rental and owner-occupied, and we spend relatively too much by subsidizing investors via the low income housing tax credit.
It’s true that low interest rates, other things being equal, tend to push up housing prices. But other things needn’t be equal. If we need more affordable housing, let’s focus on housing policies to bring it about—and not press the Fed to douse the whole recovery.
We are going to be hearing more of this from Wall Street Democrats, who may be invoking the public interest but are really articulating their own.
In fact, the Biden public investment program proposes to put a lot more money into affordable housing. But it has yet to be enacted; and as this excellent article in Shelterforce explains, even the full Biden program would barely make a dent on the need.
Rattner says not a word about subsidizing more affordable housing or about housing policy at all. There is something off about a Wall Street plutocrat proposing to moderate other people’s housing prices by strangling a fragile recovery. I’ve been in Rattner’s house. It occupies a good part of a city block, facing Fifth Avenue. His own housing is entirely secure.
Next, Rattner worries that the recovery is too strong. He writes:
A robust 850,000 jobs were added in June, and American consumers, overall, are emerging from lockdown with trillions in savings to spend on things such as vacations, home improvements and new cars. Meanwhile, the Fed not only has been keeping short-term interest rates near zero but also is buying at least $120 billion a month of debt securities; this has the effect of suppressing long-term interest rates.
All of that winds up shoveling more money into an economy that likely already suffers from too much money, not too little, raising the specter of overheating and accelerating inflation.
Where to start? The economy is still short 6.5 million jobs relative to where it was before the pandemic began. Most economists think the next jobs report, due to be released Friday, will show creation of about 700,000 jobs in July—good, but below the June level. At this rate, it will be 2022 before we are back to a pre-pandemic labor market.
As it happens, the sainted bond market disagrees with Rattner about inflation. The interest yield on the 10-year Treasury bond, a predictor of whether markets expect higher inflation, has been falling since April. Back then it was above 1.6 percent. Now it’s around 1.2 percent.
Rattner concludes, “We need to return to a more normal monetary policy. While I’m always hesitant to predict financial markets, I think investors would accept more restrained policies from the Fed with relative calm.”
Translation: We need tighter money, which will raise interest rates. Isn’t that nice for investors? But what about the rest of us?
The entire Federal Reserve Board, currently five conservative Republicans and one centrist Democrat, is to the left of Rattner on this.
We are going to be hearing more of this from Wall Street Democrats, who may be invoking the public interest but are really articulating their own. Today’s economy is a distant cousin of the stagflation of the 1970s, when we had both supply pressures that raised prices in fuel, food and medical care, but we also had excessive unemployment. Back then they called it stagflation. The Fed’s remedy in 1979 was to put interest rates through the roof and engineer a deep recession, a political gift to Ronald Reagan in the 1980 election.
There will likely be more selective price pressures, reflecting supply problems, and more misguided calls for austerity. One possible area is food, where the impact of droughts, extreme heat, and fires has begun eating into cropland. But none of the supply bottlenecks offers a good reason to strangle the recovery. (How would slower growth cause more semiconductors to materialize?)
One final complaint about Rattner’s oped. According to the author ID, “Mr. Rattner served as counselor to the Treasury secretary in the Obama administration.” Yes he did. But that doesn’t do justice to who he is.
A more accurate ID might go something like this: Mr. Rattner is chairman and CEO of Willett Advisors, a financial firm that manages, among other clients, the wealth of Michael Bloomberg. In 2010, he and the private equity firm he headed at the time, Quadrangle, had to pay $10 million in restitution and $18.2 million in fines to settle a case in which the New York attorney general and the SEC alleged that Quadrangle had paid kickbacks to obtain New York state pension fund business.
Mr. Rattner admitted no wrongdoing but agreed to be barred from pension fund activities for five years.
As his legal troubles mounted, Mr. Rattner abruptly resigned his post as President Obama’s director of the auto industry rescue in 2009.