Larry Summers and Jeff Immelt: Preparing for a Post-Consumer Economy

The Financial Times interview with the National Economic Council Director “Lunch with the FT: Larry Summers” quotes Summers’ vision:

“This new American economy, Summers hopes, will be ‘more export-oriented’ and ‘less consumption-oriented’; ‘more environmentally oriented’ and ‘less energy-production-oriented’; ‘more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented’; and, finally, ‘more middle-class-oriented’ and ‘less oriented to income growth that is disproportionate towards a very small share of the population’.”

General Electric (GE) CEO Jeff Immelt’s commentary in the FT “Innovation can give America back its greatness” contends that “we need to dispel the myth that American consumer spending can lead our recovery.” Immelt comes just short of calling for an industrial policy based on technical innovation, manufacturing and exporting; a combination of Silicon Valley and China.

I like the talk; it matches the theme of President Obama’s call for the country to get back to making things. But I find both Summers and Immelt disingenuous. Summers has not tried to restrain Bernanke and Geithner’s attempts to resurrect the shadow banking system for consumer finance. And Immelt cannot give up the overdependence on the aging technology of medical imaging highlighted with healthcare reform.

To be fair GE has unsuccessfully tried to exit consumer businesses, and has been slowly delevering its finance businesses. But the company is spending political capital to mitigate the impact of healthcare reform on its big iron, while its finance arm is being nursed back to health by FDIC debt guarantees.

Continuing with the talk doesn’t match the walk, investment banks licensed as Fed bank holding companies are not changing their behavior. Bloomberg’s “Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds” reports the bank is planning to “bundle mortgage securities into new bonds that often offer investors an additional layer of protection, or collateral, from downgrades.”

Is Morgan Stanley (MS) creating triple-A from Baa2 out of thin air? Maybe not, but they just might be repeating the worst AIG nightmare by offering back CDO debt insurance with collateral. Again, are we creating the new American economy or desperately trying to hang on to what worked in the past?

Immelt is clear in his commentary that this recession is game changing and the successes of the past cannot be repeated. But at the same time, neither government nor private industry seem ready for any meaningful change.

Disclosure: Author is long AIG and GE.

Comments

[Gregman2:]

There should be an economic penalty for leaders who are late to smell the coffee. Especially when their actions or inactions have helped cause the economic pains.

Jul 14 10:45 AM