Is economics any different? Not at all. To better understand the odds of success of the Obama Administration in handling the current economic malaise, we have to know the players and the surrounding conditions. What odds of winning would one assign to the Obama economic team?
Let us note at the outset in this regard our own conviction that the financial and economic development and the status of a nation or a group of nations is ultimately an integral function of its (or their) legal system(s), because it is a legal system which enables - and also inevitably forms - the economy. The sophisticated, flexible and adaptable economies of the Western world are based on the rule of law and the common law tradition, which permits steady, if fluctuating growth and progress. By comparison, economies based on primitive religious law, for example, have no chance of independently producing and/or sustaining modern economies, and - to the extent that any primitive religion gains the upper political hand in any country - the economy of such a country is predestined to fall back into the tyrannical chaos of the dark ages.
In economics the determinative effect of the system of law on economic development is called the legal origins theory, adhered to by such highly cited - but also controversial - economists as Andrei Shleifer, co-founder of the $40 billion value equity investment specialist, LSV Asset Management, whose mentor, economist Lawrence Henry Summers, is the current head of the White House National Economic Council of U.S. President Barack Obama, which has the following responsibilities:
"The National Economic Council (NEC) was established in 1993 to advise the President on U.S. and global economic policy. It resides within the Office of Policy Development and is part of the Executive Office of the President. By Executive Order, the NEC has four principal functions: to coordinate policy-making for domestic and international economic issues, to coordinate economic policy advice for the President, to ensure that policy decisions and programs are consistent with the President's economic goals, and to monitor implementation of the President's economic policy agenda."Summers is a highly visible figure on the economic scene about whom we have already posted previously at LawPundit. As we read at the Wikipedia:
"Summers is the son of two economists, Robert Summers and Anita Summers, who are both professors at the University of Pennsylvania, as well as the nephew of two Nobel laureates in economics: Paul Samuelson (sibling of Robert Summers, who, following an older brother's example, changed the family name from Samuelson to Summers) and Kenneth Arrow (Anita Summers's brother)."Summers was the the Chief Economist of the World Bank from 1991-1993. From 1993-1995, Summers was Undersecretary for International Affairs. In 1995, he was Deputy Secretary of the Treasury under his mentor Robert Rubin, who he succeeded as Secretary of the Treasury 1999-2001. Summers then subsequently became the first Jewish President of Harvard, from 2001 to 2006, but his aggressive modernizing attitude made him little-loved with the then inert Harvard faculty of Arts & Sciences (who have improved since that date, as they must). Summers was replaced in the interim as Harvard President by popular former Harvard President Derek Bok (a close Harvard classmate of the late Professor John Kaplan, my mentor at Stanford Law School).
Kimberly Amadeo at About.com adds another important connection for Lawrence Summers as follows, showing how the players in this field are all closely connected:
"Treasury Secretary Tim Geithner was Summers' protege at the Treasury Department before he took over as Chair of the New York Federal Reserve."Arianna Huffington has a creative post in this connection at Tim Geithner, CNBC, and the Second Coming of Known Unknowns. As written at Freakonomics, it is the plan of Geithner - surely with Summers playing a key role as the U.S. President's senior economic advisor - which is being implemented by the Obama Administration as the major package for economic recovery.
In the above-cited post, Huffington directs us to The Baseline Scenario blog of Simon Johnson, Professor of Entrepreneurship at MIT's Sloan School of Management, where Johnson's Financial Crisis for Beginners is the best simplified online explanation of just that, the present crisis.
Johnson in turn directs more economically advanced readers to Charles I. Jones of the Graduate School of Business at Stanford University and his preliminary The Global Financial Crisis of 2007-20??, A Supplement to Macroeconomics (W.W. Norton, 2008), March 2, 2009.
A different, but equally necessary, explanation of the financial crisis, discussing the various events in the crisis chronology is found in a posting by Doug Diamond and Anil Kashyap at Freakonomics titled Diamond and Kashyap on the Recent Financial Upheavals.
What is important to remember is that financial crises are nothing new and that lessons can be learned from past debacles. For example, here is what George Soros said in 1999:
"I believe markets are amoral. The problem is that they are not always stable. They frequently swing to excesses. That is why I say that markets, instead of swinging like a pendulum, can sometimes act like a wrecking ball."Soros again in 2008 in an interview by Judy Woodruff at the New York Review of Books:
"The economics profession has developed theories of "random walks" and "rational expectations" that are supposed to account for market movements. That's what you learn in college. Now, when you come into the market, you tend to forget it because you realize that that's not how the markets work....Soros writing from Davos with his Outlook for 2009 at Project Syndicate:
[C]ontrolling money doesn't control credit...money and credit don't go hand in hand. The monetarist doctrine doesn't stand up. So you have to take into account the willingness to lend. And if it's too great--if borrowers can obtain large loans on the basis of inadequate security--you really have to introduce margin requirements for such borrowing and try to discourage it....
[Y]ou have to control leverage--credit obtained for investment purposes--somewhere. Excessive use of leverage is at the bottom of this problem....
[T]here has been excessive use of credit and it does have to be limited. So we are now in a period of very rapid deleveraging and I think that in the future we ought not to allow leverage to be used to the extent that it has been in the past...."
"The future of the global economy will depend greatly on whether President Barack Obama launches a comprehensive and coherent set of measures, and on how successfully he carries them out....Read more from Soros here.
There is no way to reestablish economic equilibrium in one fell swoop. Instead, the economy must first be pumped full of money to make up for the collapse of credit; then, when credit begins to flow again, the liquidity must be drained from the system almost as fast as it was injected. This second operation will be both politically and technically more difficult than the first: it is much easier to give money away than to take it back. It is all the more important that stimulus packages be channeled into relatively productive investments. The bailout of the motor industry ought to be the exception, not the rule."