March 20, 2023

DealBook: Making a Case for One Leader at JPMorgan

JPMorgan Chase shareholders will vote on whether Jamie Dimon should be chairman and chief.Larry Downing/ReutersJPMorgan Chase shareholders will vote on whether Jamie Dimon should be chairman and chief.

“This isn’t about good governance; it’s about busybodies without a clue, trying to do the dumbest thing — slapping and shaming a superb C.E.O. for utterly no practical reason.”

That’s what Barry Diller, the media mogul, told me on Monday about the possibility that shareholders could vote to strip Jamie Dimon, the chairman and chief executive of JPMorgan Chase, of his chairman role.

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Mr. Diller’s colorful bluntness adds some much-needed sanity to all the hyperventilating pundits and corporate governance hysteria about the fate of Mr. Dimon in recent days. (Incidentally, Mr. Diller expressed this view even though his company, IAC/InterActiveCorp, has split the chairman and chief executive roles.)

Next Tuesday, Mr. Dimon will face a nonbinding shareholder vote about whether the roles of chairman and chief executive at JPMorgan should be split. The vote may not sound like a big deal. If he loses, he would remain the C.E.O., and technically, he could remain the chairman since the vote is nonbinding. But the question before shareholders has moved beyond simply a philosophical debate about whether corporations should have a separate chairman and chief executive.

The vote increasingly appears to have become a referendum on Mr. Dimon personally.

In truth, the machinations around the vote at JPMorgan have an “Alice in Wonderland” quality. Call it “Jamie at the Mad Hatter’s Tea Party: The Tempest in a Teapot Edition.”

JPMorgan’s Trading Loss

While Mr. Dimon has made his share of mistakes — among them the “London Whale” scandal that has cost the bank billions and a series of regulatory blunders — they have not crippled the bank, despite making great headlines. It may not be popular to say, but the incontrovertible fact remains that JPMorgan is still one of the best-performing banks on Wall Street under Mr. Dimon. The firm is possibly the only major bank in the nation that did not require a bailout. It hasn’t lost money in any single quarter while Mr. Dimon has been at the helm. And it has outperformed most of the Standard Poor’s 500-stock index as well as many of its peer banks over the last five years.

Worse, the frenzy over splitting chairman and chief executive at JPMorgan misses a crucial and fundamental point: the person that would most likely become the chairman, Lee Raymond, is already the board’s “lead director” and already performs virtually the same duties that he would with the chairman title.

So the debate has seemingly become about semantics. Should Mr. Raymond, currently the lead director, hold the title of chairman? If you didn’t think there was enough accountability and adult supervision with him in that role, it’s hard to believe you will think there will be if he becomes chairman. Of course, the board could bring in an outside chairman, but that adds its own series of complications.

Even Ira Millstein, one of the fathers of the corporate governance movement, told me that while he preferred a separation of powers, his view had evolved. “Because of the evolution of a broad consensus on the need for strong board leadership, I now believe that one size may not necessarily fit all. A strong lead director with the same duties as a chair might serve the purpose,” said Mr. Millstein, chairman for the Center for Global Markets and Corporate Ownership at Columbia Law School and a partner at Weil, Gotshal Manges.

The knee-jerk response, including my own, to good governance is to separate the roles of chairman and chief executive. It just sounds as if it is more accountable to shareholders.

But the evidence that splitting the chairman and C.E.O. roles has a positive impact on performance is thin. A number of studies have tried to quantify the impact, but ultimately the debate has far from concluded.

In Europe, for example, most public companies have split the roles of chairman and chief. But then consider the financial crisis: virtually every big high-street bank in Britain required a bailout despite the corporate governance structure. Remember Enron? It had a split structure.

Take a look at Fortune’s 50 most admired companies list. Only four companies have split the role.

I also spoke with Henry M. Paulson Jr., the former Treasury secretary and former chairman and chief executive of Goldman Sachs, about the debate over Mr. Dimon’s role. In theory, Mr. Paulson said that he was not opposed to splitting the roles of chairman and chief executive in certain circumstances generally, but in this case believes it would be the wrong decision.

“Jamie Dimon saw JPMorgan through the worst financial crisis in a generation, and now through this period of great regulatory change,” Mr. Paulson said. “To me, in periods of great change, continuity of the leadership team and structure, especially under his strong leadership, is the best path. A change in structure is unwarranted, and could be counterproductive.”

The greatest immediate risk to JPMorgan is change: the possibility that Mr. Dimon decides to take his ball and go home. Mr. Diller said such a decision would be “petulant.” But it is also hard to believe that Mr. Dimon would want to continue running the firm for many years if he receives the equivalent of a no-confidence vote. Plus, there is no clear successor waiting in the wings. (That is something the bank should make a priority.)

So while the separation of two roles might be right in a perfect world, the reality is more complicated.

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Common Sense: Economic Experts Give Predictions for 2013

To many politicians, the deal that raised taxes on the wealthy and averted the fiscal cliff was a sellout, a cop-out, a Band-Aid — in short, nothing good. And now the debt ceiling showdown is looming. So why have stock investors cheered, pushing the Standard Poor’s 500-stock index to five-year highs?

My annual survey suggests that investment experts are cautiously upbeat about the economy and the stock market (but not bonds) for 2013, even though they acknowledge that political dysfunction in Washington poses risks. The tax deal may have upset Tea Party Republicans looking for big cuts in entitlement spending and liberals demanding even bigger tax increases on the wealthy. But investors seem to be taking the long view that the warring factions did in the end reach a deal, and it amounts to a $4 trillion stimulus compared with what would have happened if Congress had done nothing. Stimulus may be a bad word in Washington, but many investors seem to believe that continued deficit spending and only a modest tax increase will be good for the economy and corporate profits, at least this year.

The experts I consulted a year ago — Bill Miller for stocks, Bill Gross for bonds and Karl E. Case for real estate — proved accurate in their predictions for 2012. So I asked them for a return engagement. I also spoke to Byron Wien, vice chairman and a senior adviser at Blackstone. Last year, Mr. Wien was one of the few pundits who was exactly right about the stock market, predicting that the S. P. 500 would close the year “over 1,400.” The index ended the year at 1,426, a gain of 13.4 percent for the year.

Bill Miller:

‘The great bond bear

market has begun’

Perhaps the biggest comeback of 2012 belongs to Mr. Miller of Legg Mason, who became a mutual fund legend by beating the S. P. 500 for 15 consecutive years, from 1991 to 2005. Then, during 2008 and the financial panic, he seemingly lost his magic touch. His fund plunged 55 percent. The Wall Street Journal, in its headline about the fund’s dismal returns, spoke of his “defeat.” And after another disappointing year in 2011, he retired as head of the Legg Mason Value Trust, the firm’s flagship fund.

But Mr. Miller kept his hand in the market, managing the much smaller Legg Mason Capital Management Opportunity Trust. When I sought him out a year ago, reasoning that even the most brilliant investors can be expected to have a few bad years, he was bullish on stocks. That proved good advice. Mr. Miller’s fund gained over 40 percent in 2012, and was the top-performing mutual fund in Morningstar’s database. How did he do it?

Mr. Miller made big bets on the battered and out-of-favor homebuilding and financial sectors, the kind of contrarian strategy that served him well for so many years. Major holdings like Pulte Homes (which gained 160 percent over the past year) and Bank of America (which nearly doubled) were some his best-performing stocks.

Mr. Miller remains optimistic about stocks for 2013, with an asterisk. When I reached him this week, he offered these predictions: “The great bond bear market has begun, starting with Treasuries, which should see years of losses as interest rates gradually normalize. Equities, which outperformed bonds in 2012, will continue to do well, driven by rising earnings, strong free cash flow, solid profit margins, low inflation and attractive valuation relative to bonds. The path of least resistance for stocks and the economy is higher. The chief risk is the dysfunctional political environment, which could derail what otherwise is a very promising outlook.”

Mr. Wien, whose long career on Wall Street included stints at Morgan Stanley and Pequot Capital, told me he’s “gloomy” about prospects in Washington. “We can’t solve our problems simply by getting the rich to pay more. We have to broaden the tax base, revise the tax code and tackle the structural problems we aren’t facing. We need to deal with entitlements. The latest deal did absolutely nothing to address that. I don’t know if democracy can solve these problems.”

Despite his success at predicting the market last year, Mr. Wien isn’t putting a number on the S. P. 500 this year, but his expectations are modest. He expects the S. P. 500 to test 1,300 at some point, which would be about a 10 percent decline from current levels, before ending the year about where it is now. “I don’t expect the stock market to do much this year,” he said. “Most analysts are forecasting returns of 10 percent or more, but I think earnings could be down for the year, which would make it hard for the market to gain that much.”

But he’s optimistic about stock markets in some other countries, especially China, where stocks lagged last year, and Japan, which has been in the doldrums for years. He’s forecasting a 20 percent gain this year for Chinese shares.

Bill Gross: ‘Ashes in our stocking’

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High and Low Finance: Lessons From Europe on Averting Disaster

Let’s hope so.

A year ago, the world’s markets were watching Europe with rising fear. Some expected 2012 to be the year that the euro zone broke up. Germany did not want to pay to bail out its less fortunate neighbors unless they agreed to severe austerity and to what amounted to a surrender of sovereignty — ideas that other countries were loath to accept.

What ensued during the year was a series of summit meetings that often seemed to do more for the hotel business in assorted European capitals than they did to solve the problem. Agreements in principle were announced, sending markets up, only to stumble back when the details got difficult.

What the naysayers missed was that there really was a common commitment to save the euro, and that in the end politicians and central bankers would do what was needed to avert disaster. Finally, in July, the European Central Bank came up with a plan that assured the euro area banks, and the troubled governments, that they would have access to money at reasonable rates. Angela Merkel, the German chancellor, went along, angering some of her German colleagues, who thought she was straying from basic principles.

So it could be in the United States Congress. The outgoing Congress went up to the final minutes, amid much angst, before it averted the fiscal crisis. There are reasons to grumble about the details, and more deadlines loom in the new Congress, but the essential point was that in the end the House Republicans allowed a bill to pass even though a majority of them opposed it.

John A. Boehner, the speaker who has often seemed scared to do anything that his Tea Party colleagues might oppose, not only allowed the vote but chose to vote for the proposal. The first indication of whether this is a new dawn, or simply a case of the House Republicans being outmaneuvered, could come when the debt ceiling is addressed. Logically, the debt ceiling is an absurd vote to begin with. Raising it simply allows the government to pay the bills for spending the Congress already approved. To allow the spending bills to pass, but to then refuse to raise the debt ceiling, is equivalent to a family’s deciding to refuse to pay the credit card bill while continuing to spend. That will only accomplish destruction of the family’s credit.

Perhaps some Republicans will threaten to keep the country from paying its bills to accomplish something they don’t otherwise have the votes to accomplish. But if the European precedent holds, the final result will at least avert disaster.

Whether more than that can be hoped for may depend in part on whether those screaming for major cuts in federal spending actually believe their rhetoric — the talk about the United States becoming another Greece.

The reality is that the current budget deficit largely reflects two things: exceptionally low government revenue and the continuing problems caused by the financial crisis and recession that followed the bursting of the housing bubble. Bringing tax revenue back to historical levels, as well as the growth in revenue and reductions in spending that will automatically follow an improving economy, will make a major difference.

There are issues that must be addressed regarding health care costs and Medicare, as well as the fact that there will be fewer workers for each retiree as the baby boomers retire. But those who see a Greek-type crisis here should ask themselves why the government can borrow at interest rates that remain extraordinarily low. The world’s trust in Uncle Sam’s ability to pay its debts has remained high.

What are not high are taxes, although a poll would no doubt show that many people think otherwise.

Federal taxes, relative to the size of the economy, are significantly lower than they were after Ronald Reagan cut them. During 2012 federal revenue amounted to around 17 percent of gross domestic product. At the Reagan low point, the figure was a full percentage point higher. In 2009, when the deficit was ballooning, the figure fell below 16 percent, something that had happened only once during the more than 60 years for which comparable data is available.

Back in 2000, federal revenue approached 21 percent of G.D.P. The assumption that such strong collections would continue played a major role in the forecasts of budget surpluses as far as the eye could see. In 2001, aides to President George W. Bush pointed to the figure as proof that Americans were overtaxed. It turned out that tax revenue figures were temporarily inflated in two ways by the bull market in technology stocks. Not only were there a lot of capital gains to be taxed, but soaring share prices also produced a lot of ordinary income for those employees and executives who could cash in stock options.

At the time, it was assumed that such options had no significant impact on tax revenue, because the income that went to the employee provided an offsetting tax deduction for the company that issued the options. That might have been true had the companies been paying taxes, but many of the most bubbly stocks were in companies that never had, and never would, pay a dollar in income taxes.

That revenue would have come down sharply after the technology stock bubble burst, even without the Bush tax cuts. But those tax cuts worsened the situation and are a major cause of the current deficits.

It might be interesting to consider what would have happened in the 2012 presidential campaign had either candidate been willing to, as Adlai Stevenson once said, “talk sense to the American people.”

In reality, neither candidate would have dreamed of saying, as an economist did a week ago: “Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.”

It would have been only a little more likely to hear a candidate say, as another economist said after the fiscal deal was reached, “We need a tax system that can promote economic growth and raise the revenue the American people want to devote to government.”

The first quote came from a column in The New York Times by N. Gregory Mankiw, a Harvard economist. The second statement was made W. Glenn Hubbard, the dean of the Columbia University business school, who was chairman of the president’s Council of Economic Advisers when the Bush tax cuts were enacted. He went on to say, a Times article reported, that some Bush-era policies were no longer relevant to the task of tailoring a tax code to a properly sized government.

Mr. Mankiw and Mr. Hubbard were among the top economic advisers to Mr. Romney. If they advised him to make similar statements during the campaign, he did not take the advice.

“Fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic,” Mr. Mankiw added.

Floyd Norris comments on finance and the economy at

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Today’s Economist: Simon Johnson: Fiscal Confrontation Undermines the U.S.


Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

It is axiomatic among most of our Washington elite that the United States cannot lose its pre-eminent global role, at least not in the foreseeable future. This assumption is implicit in all our economic policy discussions, including how politicians on both sides regard the leading international role of the United States dollar. In this view, the United States is likely to remain the world’s financial safe haven for international investors, irrespective of what we say and do.

Today’s Economist

Perspectives from expert contributors.

Expressing concerns about the trajectory of our federal government debt has of course become fashionable during this election cycle; this is a signature item for both the Tea Party movement in general and the vice-presidential candidate Paul D. Ryan in particular.

But the tactics of fiscal confrontation – primarily from the right of the political spectrum – make sense only if the relevant politicians, advisers and donors firmly believe that the American financial position in the world is unassailable.

Threatening to shut down the government or refusing to budge on taxes is seen by many Republicans as a legitimate maneuver in their campaign to shrink the state, rather than as something that could undermine the United States’ economic recovery and destabilize the world. This approach is more than unfortunate, because the perception of our indefinite pre-eminence – irrespective of how we act – is at completely odds with the historical record.

In his widely acclaimed book, “Eclipse: Living in the Shadow of China’s Economic Dominance,” Arvind Subramanian places the rise of the dollar in its historical context and documents how economic policy mistakes, World War II and the collapse of empire undermined the British pound and created space for the United States dollar to take over as the world’s leading currency. (Dr. Subramanian and I are senior fellows at the Peterson Institute for International Economics; we have worked together, but not on this book.)

Very few people in Washington are aware – and even fewer care – that persuading people around the world to hold both their official government reserves and their private wealth in dollars was the result of a hundred-year process and a great deal of hard work. Responsible economic policy and being careful about fiscal accounts were absolutely part of why the United States persuaded others that holding its dollars was appealing.

But Dr. Subramanian also asserts that two other factors were important: the sheer size of the American economy, which overtook Britain’s, probably at some point in the late 19th century, and the United States current account surplus. In particular, American exports were far larger than imports during World War I and in the years that followed, and by the end of World War II the United States had amassed almost half the gold in the world (gold at that time was used to settle payments between countries).

In effect, the United States dollar pushed aside the British pound in part because the United States became the world’s largest creditor.

Dr. Subramanian’s point is not just that the United States will lose its predominance but rather that it has already lost key advantages. The United States has run current account deficits consistently since the 1980s; we are now the world’s largest debtor, not a creditor. About half of all federal debt is held by foreign individuals and governments. Emerging markets have amassed very large foreign-currency reserves (much of which is this Treasury debt in dollars).

The Chinese are embarked on a long-term strategy to make their currency, the renminbi, into an appealing reserve currency. Their economy is currently about one-quarter the size of the American economy, but it is catching up fast. China has overtaken the United States as the world’s leading exporter. You may not agree with Dr. Subramanian on the extent of Chinese dominance today, but there is no question that this is a real possibility within 20 years.

The “fiscal cliff” coming at the end of this year could be resolved in a reasonable manner (if you need a primer on what is coming, I recommend these graphics from NPR’s “Planet Money”). For example, let the Bush-era tax cuts expire and replace them with other temporary tax cuts (e.g., to payroll taxes), to provide short-term support to the economy. And American politicians could find other ways to restore federal government revenue to where it was in the late 1990s while also bringing health care spending under control.

The point is not to make precipitate adjustments but rather to increase revenue and limit spending in a reasonable manner over the next two decades.

But this is not going to happen. Congressional Republicans will refuse to consider anything they regard as a tax increase, and the fiscal cliff is likely to become a repeat of the debt-ceiling fight last summer, which ended up making everyone in Washington look bad. What would be the consequences?

First, this will definitely be destabilizing to world financial markets – making people more concerned about risk both in the United States and around the world. Anyone who pays a “risk premium” when they borrow – including American home buyers and euro-zone governments – is likely to be affected negatively. Uncertainty and fear will increase, slowing the economy in the United States and perhaps contributing to yet another round of crisis in Europe. The stock market will presumably fall.

Second, yields (market-determined interest rates) on United States Treasury debt are likely to decline. In most other countries, when politicians act irresponsibly, bond yields go up. But we are still the world’s No. 1 safe haven – so capital will come into the United States. Some politicians will see this as justification for their tactics – and continue with more of the same.

Third, Dr. Subramanian will be proved right, faster than would otherwise be the case. The world will more eagerly seek an alternative to the fickle American dollar. It will become increasingly hard for the United States to borrow at reasonable interest rates. Indeed, one striking point in “Eclipse” is the speed with which the British pound lost its predominance once the British position weakened as a result of World War I.

The dollar became strong because American politicians were responsible, careful and willing to compromise. Fiscal extremism, confrontation and a refusal to consider tax increases over any time horizon will undermine the international role of the dollar, destabilize the world and make it much harder for all of us to achieve any kind of widely shared prosperity.

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Today’s Economist: Simon Johnson: Who Built That?


Simon Johnson is Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and former chief economist at the International Monetary Fund. His books include “13 Bankers.”

Perhaps the biggest issue of this presidential election is the relationship between government and private business. President Obama recently offended some people by appearing to imply that private entrepreneurs did not build their companies without the help of others (although there is some debate about what he was really saying).

Today’s Economist

Perspectives from expert contributors.

Mitt Romney’s choice of Paul D. Ryan as vice presidential running mate is widely interpreted as signaling the further rise of the Tea Party movement within the Republican Party – with the implication that the private sector may soon be pushing back even more against the role of government.

For most of the last 200 years, national economic prosperity has been about creating and sustaining a symbiotic relationship between government and private business, including entrepreneurs who build businesses from scratch. This symbiosis was long a great strength of the United States, something it got right while other nations failed to do so, in various ways.

Is the partnership between government and business now really on the rocks? What would be the implications for longer-run economic growth of any such traumatic divorce?

To think about these issues, I suggest starting with “Why Nations Fail” by Daron Acemoglu and James Robinson, a sweeping treatise on political power and economic history. (I have worked with the authors on related issues, but I wasn’t involved in writing the book. I am using their material as a reference point throughout my new course this fall at the Massachusetts Institute of Technology, “Global Controversies.”)

Income per capita in 1750 was relatively similar around the world. There were some pockets of prosperity – imperial capitals and trading cities – but most people lived at roughly the same level of income (and lived about the same length of time). That changed dramatically in the hundred years after 1800; some countries charged ahead in terms of industrialization and broader economic development, while others lagged. (Lant Pritchett memorably labeled this phenomenon “Divergence, Big Time.”)

Since 1900, while average income levels have risen almost everywhere, there has been surprisingly little convergence in income per capita. Countries that were relatively rich in 1900 are, for the most part, relatively rich today. Most countries that were poor in 1900 have failed to catch up with the highest income levels today – with some notable exceptions in East Asia and for some countries with a great deal of oil.

In the Acemoglu-Robinson view, it was all about having a favorable head start – based on strong and fair rules of the game:

Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.

These were excellent conditions for innovation and private-sector investment. People who were not born wealthy were able to educate themselves and create their own enterprises. But the government also played a very helpful role, with investments in clean water and public health, developing public education and supporting the creation of transportation and communication networks.

Equality before the law also became an essential component of successful societies – for example, much more present in the United States than in Mexico.

At least in the 19th century, government cooperated closely with private business in the United States. In much of the world, this relationship has never worked well – and conditions for growth are consequently undermined. “Why Nations Fail” explores in great detail exactly when and why politicians choke business, how economic oligarchs capture and abuse political power and what happens when militaries become too powerful. It is sobering reading.

“Why Nations Fail” has been very successful, in part because the history appeals to people on both the right and the left of the political spectrum. To those on the right, economic development requires strong property rights. To those on the left, constraints on the power of elites are essential. Both views garner a great deal of support from the Acemoglu-Robinson view of how the United States, Western Europe and a few other places did so well.

The United States avoided the problems on which the book focuses, but nevertheless it now faces a major struggle regarding the nature of its society — and its future.

The 20th century brought a new and expanded role for government, putting into effect regulations that constrained what private business could do (starting with antitrust laws and food purity rules), providing various forms of social insurance (including old-age pensions) and increasing marginal tax rates (particularly on income). The modern federal government also operates a global military presence on a scale unimaginable to any American before 1941.

Unlike the populations of some countries, the American people have never reached a consensus over what was achieved and what was given up in the 1930s. In the United States, the rising role of the state produced a long-term backlash, culminating most recently in the form of a tax revolt (from the 1960s), a move to the right in the Republican Party (beginning with Ronald Reagan and running through Newt Gingrich directly to Mr. Ryan) and a deep-seated conviction that tax rates and government spending must be reduced (“starve the beast”).

The discussion of Mr. Ryan and his budget ideas is likely to become central to the election over the next two months – and this is entirely appropriate.

A powerful coalition has risen against the state. It sees modern government as abusive and as standing in the way of economic recovery and growth. There is a strong urge to undo the reforms of the 1930s and roll back government at all levels. The economist Arthur Laffer spoke for many others when he said, “Government spending doesn’t create jobs, it destroys jobs.”

In truth, we all built the modern American economy. This certainly includes individuals taking responsibility for themselves, becoming more educated and working hard to develop their own companies. But the government also played a constructive role.

Can our political system reach a reasonable agreement on how to divide the benefits and share the costs? In “White House Burning,” James Kwak and I proposed one way to do this – phasing in a fiscal adjustment based on the principle that revenue should return to where it was before the Bush tax cuts. Mr. Ryan is proposing a very different vision: phasing out the nonmilitary part of federal government.

In my assessment last month, I found that anything close to Mr. Ryan’s version would be too extreme.

Mr. Ryan wants to strengthen the private sector and get government out of the way. In my reading of Professors Acemoglu and Robinson, Mr. Ryan’s fiscal intentions would destroy the positive role of government in modern America — throwing the baby out with the bath water. This would not be good for continued private-sector development, on which we all depend.

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Spotlight Fixed on Geithner, a Man Obama Fought to Keep

“Take a walk with me,” he said to Carole Sonnenfeld Geithner, within earshot of others.

Their stroll on the South Lawn was Mr. Obama’s last step in a lengthy effort to keep her husband, Timothy F. Geithner, as secretary of the Treasury for the rest of the president’s term. Having worn down Mr. Geithner, Mr. Obama wanted to explain to Mrs. Geithner why it was important that her husband delay his return to New York.

That Mr. Obama went to such lengths to keep Mr. Geithner, after not having done the same with others on his economic team who had left at midterm, underscored how much he had come to rely on Mr. Geithner.

The question for outsiders as varied as Tea Party Republicans and liberal Democrats is why Mr. Obama would be so insistent that Mr. Geithner stay. As Treasury secretary, he was the highest-ranking member of an economic team that underestimated the depth of the downturn, and he has managed both to anger Wall Street firms and to be a target of criticism at Occupy Wall Street rallies.

For Mr. Obama, however, Mr. Geithner has emerged as the indispensable economic adviser who has outlasted every other member of the original inner circle and whose successes easily outweigh his missteps. The two are not friends exactly — Mr. Geithner rolls his eyes at the idea of playing golf, the president’s preferred form of relaxation — but they are what David Axelrod, Mr. Obama’s political adviser, calls “kindred spirits.”

Europe’s troubles, perhaps more than anything, highlight what Mr. Obama likes about Mr. Geithner, because they help show how the effects of the financial crisis could have been worse in this country.

After a rocky first few weeks in the job, Mr. Geithner managed to stabilize the country’s troubled banks by forcing them to own up to their problems and seek additional funds from both the government and the private sector. The Treasury has even earned a profit for taxpayers on the still-reviled bank bailout program.

European leaders — defying repeated advice from Mr. Geithner, by phone and in five trips so far this year — have taken a much less aggressive approach, applying one Band-Aid after another to address their mounting debts and ailing banks, only to discover they must do more.

“They’re moving ahead, but we just need them to move ahead more quickly and with more force behind it,” Mr. Geithner said of European leaders on Thursday, after meeting with Pacific region finance ministers in Honolulu.

Many outside analysts believe that if Europe had followed the Treasury’s lead sooner and forced banks to hold more capital, its financial institutions would not be so vulnerable.

Yet the administration’s success in stabilizing the financial industry stands in contrast to its inability to bring down unemployment and foreclosures. The administration, like many private economists, misjudged the length of the downturn, and Mr. Geithner was among those who pushed for more emphasis on deficit reduction than on doing more to help the economy in the short term.

As a consequence, Mr. Obama’s economic team failed to help him prepare Americans for the pain ahead. It has proved a defining mistake of the Obama administration.

Although Congress limited the administration’s options, many economists fault Mr. Obama and Mr. Geithner for being too timid in intervening, especially to help homeowners. In White House meetings, Mr. Obama has repeatedly voiced frustrations — sometimes brandishing letters from distressed homeowners — that the administration’s initiatives have not helped nearly as many homeowners as advertised.

“I just don’t think they tried hard enough, and I’ve told the administration that,” said Alan S. Blinder, an economist at Princeton and former vice chairman of the Federal Reserve. “They haven’t done the really difficult things — like using a lot more public money. Yes, there are legal complexities, political difficulties and all that. But stemming this epidemic of foreclosures was — and still is — vitally important.”

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Debt Bill Becomes Law, Averting Default

The Senate passed the bill, 74 to 26, earlier on Tuesday after a short debate devoid of the oratorical passion that had echoed through both chambers of Congress for weeks.

A few minutes after the vote, President Obama excoriated his Republican opposition for what he called a manufactured crisis that could have been avoided. “Voters may have chosen divided government,” he said, “but they sure didn’t vote for dysfunctional government.”

The compromise, which the House passed on Monday, has been decried by Democrats as being tilted too heavily toward the priorities of Republicans, mainly because it does not raise any new taxes as it reduces budget deficits by at least $2.1 trillion in the next 10 years. But it attracted many of their votes, if only because the many months of standoff had brought the country perilously close to default. And rather than soothing already nervous markets, the final passage sent stocks lower.

The wrangling also laid bare divisions within both parties, in the House where scores of the most conservative Republicans and most liberal Democrats refused to vote for the bill, and again in the Senate where senators such as Kelly Ayotte of New Hampshire and Mike Lee of Utah, both Republican freshmen blessed by the Tea Party, also voted against it. The last to vote was Senator Olympia J. Snowe of Maine, who conferred for several minutes with Senator Jon Kyl of Arizona, her face twisted in a grimace, then voted yes, as he had done. Ms. Snowe, a moderate Republican who faces re-election next year, is already a target of Tea Party activists in her state.

In a chamber where a Democratic majority was essentially bending to the will of a Republican minority, and where 60 votes were needed under the rules, 28 Republicans voted against the bill but only 6 Democrats voted against it. (One independent went each way.) In contrast, in the House, mostly the Republicans voted yes and about half the Democrats voted no.

Senator Mitch McConnell of Kentucky, the minority leader, who played a central role in the ultimate compromise, said his party’s goal was “to get as much spending cuts as we could from a government we didn’t control.”

“It may have been messy,” he said. “It may have appeared to some that their government wasn’t working, but in fact the opposite was true.” Legislating, he added, “was never meant to be pretty.”

He and Senator Harry Reid of Nevada, the majority leader, had a gentle toe-to-toe as the debate ended, praising each other’s performance while denouncing each other on the substance.

“It’s never, ever personal,” Mr. McConnell said.

Mr. Reid presaged the next battle, when an appointed Congressional committee is to seek new ways to cut the deficit, by rejecting the assertions of his Republican colleagues that the next phase would again exclude revenue increases, which the Democrats failed to include in the first round. “That’s not going to happen,” Mr. Reid said.

Mr. Obama, too, called for the ultimate solution to include new revenues, including raising taxes on the wealthiest Americans and closing corporate loopholes, saying that he would fight for that approach as the Congressional commission considers what to recommend to Congress for an up-or-down vote before the end of the year, as the new law requires.

Enactment of the legislation signals a pronounced shift in fiscal policy, from the heavy spending on economic stimulus and warfare of the past few years to a regime of steep spending cuts aimed at reducing the deficits — so far, without new revenues sought by the White House.

“Make no mistake, this is a change in behavior from spend, spend, spend to cut, cut, cut,” said Senator Lamar Alexander, Republican of Tennessee, as the debate began on the Senate floor.

But the fight, which is only half over until a second round of deficit reduction is completed over the next five or six months, also exposed deep ideological schisms between and within the political parties, and tarnished the images of Congress and the president alike.

And the fight left many lawmakers on both sides deeply uneasy — including Senator Richard J. Durbin, Democrat of Illinois and the assistant majority leader, who said he had consulted with the Senate chaplain over his vote, because “from where I stand it is not the clearest moral choice.” Liberal critics say the plan will hurt an already limping economy. Mr. Obama signed the law privately, away from the cameras.

Despite the tension and uncertainty that has surrounded efforts to raise the debt ceiling, the House vote of 269 to 161 was relatively strong in support of the plan. Scores of Democrats initially held back from voting, to force Republicans to register their positions first. Then, as the time for voting wound down, Representative Gabrielle Giffords, Democrat of Arizona, returned to the floor for the first time since being shot in January and voted for the bill to jubilant applause and embraces from her colleagues. It provided an unexpected, unifying ending to a fierce standoff in the House.

Although the actual spending cuts in the next year or two would be relatively modest in the context of a $3.7 trillion federal budget, they would represent the beginning of a new era of restraint at a time when unemployment remains above 9 percent, growth is slowing and there are few good policy options for giving the economy a stimulative kick.

Republicans and Democrats alike made clear they were not happy with the agreement, which was struck late Sunday between the leadership of Congress and Mr. Obama.

Despite such misgivings, members of both parties welcomed the end of the debt-limit clash after months of intrigue, partisan rancor and stop-and-go negotiations that ultimately left Congress voting just hours before a deadline to avoid default.

“On to the next fight,” said Senator John Cornyn, Republican of Texas.

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Economix: Could This Deal Raise Budget Deficits?

“From an accounting point of view, it seems obvious that you would reduce G.D.P. if you cut government spending,” said Randall Kroszner, an economics professor at the University of Chicago and a former Fed governor appointed by Mr. Bush. “But the key is really the impact on consumption and investment. If you reduce government spending and if people think that reduces uncertainty about the tax burden down the line, they may be more comfortable with spending.”



Notions on high and low finance.

It is virtually impossible to think of the impact of the debt deal as doing anything to help the economy. But give Mr. Kroszner credit for trying, in today’s front-page article by Binyamin Appelbaum and Catherine Rampell.

To come up with a rosy scenario, he suggests that uncertainty may somehow be reduced, leading to more consumption and investment. I cannot imagine anyone actually thinking this deal — with its clear potential for another bruising fight and deadlock that will do more to hurt the economy — decreases uncertainty.

In fact, this deal could manage to do the exact opposite of what it promises — raise the deficit.

If that happens, it will be because a major determinant of tax revenue is the health of the economy. Profits and growth bring revenues. This could damage the economy enough to send tax receipts down again. Although you never would have guessed it from the rhetoric, tax receipts are at the lowest level in years, as a percentage of gross domestic product. Get a healthy economy and tax revenues rise while a lot of spending, on such things as unemployment benefits, goes away.

What this has shown is that the Republican Congressional leadership is terrified of the Tea Party and of people like Sarah Palin, who hinted she would support a primary challenge to any Republican who voted to raise the debt ceiling. The leadership knew that not raising the ceiling was unthinkable, but many of the members did not.

The next showdown — assuming Congress passes the deal on Monday — will come directly after the 2012 election, but with the current Congress. So even if these people are thrown out, they have assured themselves one last chance to be totally irresponsible. Then, when the new Congress tries to undo the damage, the ones who are still there can filibuster.

What has been proved by this is that there are a substantial number of members of Congress who basically are opposed to the government and welcome anything that would keep it from functioning. If the Republican leadership again grants them veto power over anything, some of them will think that forcing huge spending cuts at the end of 2012 will have been a triumph, no matter what it does to the economy or to Americans less well off than themselves.

If Mr. Kroszner’s rosy scenario seems unreal, there might still be one. It relies on the fact that fiscal and monetary stimulus work with lags. When recoveries really get going, they can become self-sustaining quickly.

The normal course after recessions before the 1990s was for complaints that nothing was happening to turn overnight to amazement about how fast recovery is taking hold, and then to be followed by complaints that the last round of stimulus was unnecessary.

Is it possible that we have reached an inflection point, and that despite the weak economic numbers there is really no need for more stimulus?

Yes, it is.

Is it likely?

Not so much.

What is clear is that the lessons of the 1930s — that you don’t deal with weakness by cutting back — have been forgotten or were never learned.

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Letters: Side Effects of Ever-Bigger Law Schools

Opinion »

The Thread: Scold Your Own

Conservatives turned to the founding fathers to urge Tea Party holdouts to take the long view on the debt crisis fight.

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