Big three, meet the big two and the magnificent seven

So you spend some of the past few days in a room with a bunch of economists and bureaucrats each one out gloom-and-dooming the next. No one has any new ideas. The rhetoric is so stale that ultimately your organization, primarily known for its stilted and meaningless communiqués sets a new record for vapidity and irrelevance. Meanwhile you learn that the economy for which you are responsible is circling the drain faster and faster. What’s your response?

If you are Japanese Finance Minister Shoichi Nakagawa, you start drinking the medical supplies in your travel kit, downing cold medicine like it was sake happy hour in Shinjuku. Who knows, maybe you were so aware of the grimness of what you’d be facing you even pre-gamed with a few pops on the flight over. And then you appear at a press conference slurring your words and embarrassing your country in a way that forces you to announce your resignation as soon as you get home.

Alternatively, if you are U.S. Treasury Secretary Tim Geithner, you head back to Washington and along with your long-time partner in policymaking, Larry Summers, you take on even greater responsibility for saving the United States (and by extension the global) economy than you had before. The fact that the sector over which you are assuming new responsibility, the automobile industry, faces intractable, complex, chronic problems with which you have absolutely zero experience does not daunt you. The fact that your main responsibility, saving the financial sector, isn’t going so well just yet does not daunt you. The fact that you have yet to do anything significant to address the sucking wound of the chest sustained by the U.S. housing sector does not daunt you. The fact that the stimulus package that your team worked on faces massive as yet underplayed challenges does not daunt you. The fact that you are co-author of previous financial rescues that didn’t go so well does not daunt you. You and Larry and a small team of colleagues who have been working together for over a decade and a half are special people working for a special man. You are the magnificent 7, this is your movie and you can have it all, do it all, be all things to all crises.

Personally, reading the reports of the listless G7 meeting in Rome, I think doing NyQuil shooters in the bar of the Hotel Excelsior is a much healthier response. A bit defeatist perhaps, but a looming report of Japanese contraction at the annual rate of 13 percent during the last quarter of 2008 can do that to you. Meanwhile, Tim and Larry have managed to persuade their boss and themselves that they are so smart that they can handle anything and everything including, now, the auto bailout. 

Big Three, meet the Big Two. Oh yes, there will be a task force to bring in the full range of experience in the administration. But, let’s face it, the reality is that there is no actual let’s-make-something-tangible-that-people-buy business experience within the administration. Most of the officials who have spent any time in the private sector actually worked on Wall Street in institutions where they were part of the problem rather than part of the solution. Now, I know it’s not quite fair to say there will be absolutely no relevant experience on this task force. The administration has recruited what the media called “a well-known restructuring specialist” to join them. Who’s the specialist? Well, it’s a fellow named Ron Bloom who currently is an advisor to the United Steelworkers Union. (Now there’s a success story.) Previously he ran his own firm that helped unions to use their pension funds to do takeovers and impose their management views. One example of their handiwork: the pilot’s take-over of United Airlines. (Another triumph.) Will this guy be the one to force the auto unions to make the concessions they need to make to save the U.S. auto industry? Does he understand the new technologies and business models essential for 21st Century auto industry survival?

What’s the problem here? Could it be hubris? (Could hubris be a big enough word for it?) On one level, it all seems so familiar. A president and a team that feel they have the country on their side go into their big initiatives half-cocked and ill-prepared. But on another level, it all seems more familiar than that. There was a time, in the late 1990s when Bob Rubin gathered around him a special team of people. His deputy was Larry Summers. Larry’s under secretary for international was David Lipton. The assistant secretary was Tim Geithner. The chief of staff at Treasury was Mike Froman. The head of the National Economic Council was Gene Sperling. His deputy was Lael Brainard. Another member of the team was Jason Furman. Today, these 7 are re-united (with a bunch of their old colleagues) at the heart of the Obama economic team. 

Now, I have to be careful here. I like and admire all these folks. I think each of them, in the own right, with the properly defined brief is an excellent hire. (Note: I left out some people who could have been on this list that really don’t even belong in a senior government job. That’s called discretion. Especially when it refers to a newly appointed Fed governor.) I have worked with them, respect them and consider most of them friends. But how do I put this gently? This is not a group of people who have a particularly well-developed sense of their own limitations. They are people who have, for most of their lives felt smarter than everyone around them. (One of them once explained the success of the money team during the Clinton years by asserting to me that they were smarter than anyone else in the administration and that people knew it and deferred to them. Of course, I was in the administration. On the economic side, even. And so in my head I was thinking “what am I, chopped liver?”)  

The group happened to first work in government during the Clinton years when the economy enjoyed a record expansion. Collectively, all of us in the administration took this as a sign that we were great at our jobs. Of course, you could have occupied most senior government positions with cast members of “Keeping up With the Kardashians” and provided they didn’t really touch anything or answer the phones most of that growth would have occurred anyway. (In fact, of the areas for which the government was responsible, Rubin, for example, was not a big advocate behind the scenes of cutting the deficit, one of the few big triumphs for which the Clinton economic team can actually take some legitimate credit.) Plenty of mistakes were made, and the seeds of future mistakes were planted because it was also during this period that they learned many of the behaviors and biases they are employing today. 

In foreign policy, generations are defined by big events. For one generation it was Munich and they were sworn opponents of appeasement. For another it was Vietnam and they embraced the Powell Doctrine. For others it was the fall of the Soviet empire and they believed liberated nations would automatically embrace America. For this economic team, the two defining crises were in Mexico and in Asia. In the case of Mexico, they saw Bob Rubin a trader, focus primarily on figuring out how big a chunk of change from the United States would send signal to the markets that Mexico would be ok. Size was everything. Regarding Asia, one set of lessons focused on Japan and not repeating Japan’s mistakes of government timidity and small stimulus packages. 

These views have colored their response to the crisis to date. Write a big check. Take sweeping action. So far so good, perhaps, but this is a very different, much more complex variety of economic meltdown. And on the areas where this crisis is different — its global nature, the new regulatory requirements new instruments demand, the specific nature of the collapse of the U.S. housing bubble, to name a few — there has been little innovation, there have been too few signs of special insights or creativity that would justify the hubris. And we are only seeing the beginning of the challenges. For example, in speaking to a business person in the energy sector the other day, they reported senior state officials around the United States worrying about how fast they would be able to absorb and use the funds disbursed through the stimulus. Like in the old days of development aid — the U.S. may not have the absorptive capacity to make the most of the medicine being poured into its system. (To understand better, call Shoichi Nakagawa, soon to have much time on his hands.) And then there is another problem others who like their medication too much might be able to offer some advice on: how do you get off the stimulus crack pipe once you have started with it? Economies can go into withdrawal too, or, fearing it, can find themselves grappling with serious stimulus addictions.  

The challenges we face are complex and by and large, we are lucky to have the team that is in place. But managing this crisis really is going to take a bigger tent, Larry and Tim are really going to have hear what is being said by Paul Volcker’s advisory group and outside experts (early reports not encouraging on this front). They are going to have focus their efforts, re-read Adam Smith on the division of labor and they are going to have to work very carefully to avoid believing their own press clippings or simply replaying old approaches that are no longer relevant. Either that or we are all going to be spending cocktail hour in front of the medicine cabinet for a long time to come.

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