The chair of the White House Council of Economic Advisers has decided to bail on the administration. Romer, an economics prof at the University of California (Berkeley) prior to taking her post, was one of the key players in crafting the original stimulus bill. What does her exit say about who gets access to the President? Is this a sign that the iron grip of Summers will loosen? Just what did Romer mean to the administration's economics vision? I asked Roosevelt Institute fellows and New Deal 2.0 contributors to share their views.

Rob Johnson, Senior Fellow and Director of the Roosevelt Institute's Project on Global Finance:

Christina Romer wrote the one recent speech that really contained focus on concern about unemployment. Otherwise one would think the Administration had gone to sleep and accepted 9.5 percent.   An administration that justified the bank bailouts on the grounds that "it would take the real economy down with the banks so we had no choice" seems to now be complacent when the banks are coming back and the real economy is still sputtering.

The stimulus program was too small from the get go.  It was also not focused on durable programs that would create a lasting benefit for our society.  More is needed and the key voice in the Administration that expressed these concerns is leaving.  That is cause for concern as we spiral downward with dams busting and roads and bridges breaking and trains and airports operating so slowly that foreign visitors are dismayed.

Dr. Romer also led at team at the CEA that wrote a very clear blueprint of what our longer term budget concerns are.  She focused on the role of wars, tax cuts, bailouts and medical costs contributing to the rise of the deficit and its future trajectory.  Hers was sensible thinking that will be missed in this hysteric age of the Austerians.

Jeff Madrick, Senior Fellow at the Roosevelt Institute and author of The Case for Big Government:

It is not clear how strongly Christina Romer could stand up to Larry Summers and Obama's political advisers. Or even quite where she stood on matters. Her academic record is mixed. But this is an opportunity for Obama to remake policy boldly in favor of a serious jobs strategy, an infrastructure-oriented industrial policy and a new stimulus. Given the recent record, it seems too much to hope for, however.

Thomas Ferguson, Senior Fellow at the Roosevelt Institute and professor of political science at the University of Massachusetts, Boston:

Now there's nobody in the White House familiar with the economics of the Great Depression. And Romer was very, very clear that the financial crisis and the Great Recession had not somehow magically combined to make 8.5% a valid benchmark for "full" employment. Let's see what her successor thinks on that one; it will tell plenty. Unemployment policy is the central economic problem for the United States and the person most interested in it in the White House just left.

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Marshall Auerback, Senior Fellow at the Roosevelt Institute and a market analyst and commentator:

Compared to the usual Rubinite retreads who currently dominate economic policy in the Obama Administration, Christina Romer was a decided improvement -- although clearly not a terribly influential voice if the current policy trajectory is anything to go by. In keeping with the President's alleged Lincolnesque "Team of Rivals" approach, it would be nice to see Obama use her resignation to bring in an alternative voice, such as James K. Galbraith. More likely, unfortunately, is that Professor Romer will be replaced by another Clintonista who will make all of the usual noises about the need to "get the deficit under control" in order to "retain the confidence of the markets," as well as virtually ignoring the issues of employment, stagnant economic growth and growing income inequality. In other words, there will be no team of rivals, but an echo chamber of Wall Street Democrats.

Josh Rosner, New Deal 2.0 contributor and managing director of independent research consultancy Graham-Fisher:

It is a shame but no surprise that, with midterm elections coming and likely to result in a political bloodbath, the White House made a symbolic gesture in sacrificing the senior economic official least responsible for their failed policies.

Rather than assigning blame squarely on the static thinking of the "let them eat cake" crowd still calling the economic shots, they are hoping the symbolic gesture will placate a public that voted for change.

Rather than deep self-reflection at this watershed moment in history, they have fallen flat. Rather than assigning blame to a Treasury that continues to pervert markets and distort financial reality -- causing ever more financial contractions as intermediation is further impaired -- they offer symbols.

Romer was the most likely of the current team to think big or embrace and understanding of the critical need for the bold initiatives that could address a hollowed-out economy. Increasing the educational attainment of our population in an ever more competitive world, perhaps by supporting our public through our state and community colleges. As the only out of the box thinker in a lead position, she was also most likely of this crowd to recognize that buying votes with unemployment benefit extensions may buy fewer votes than programs that genuinely focus on the reeducation and re-employment of our unemployed, into growth industries, and require some service from them in return - perhaps rebuilding failing infrastructure.

To the degree anyone is watching, without further and higher profile resignations, the symbolism of her departure will lead to greater voter cynicism.

Lynn Parramore is the editor of New Deal 2.0, a Roosevelt Institute fellow and the author of Reading the Sphinx.

Will the upcoming generation still be able to attain the American Dream?

With sky-high unemployment numbers and a pick up in hiring nowhere in sight, it would be easy for a new generation of college students and graduates to despair. With job prospects difficult at best, will they left out of the American Dream?

At a Century Foundation presentation yesterday, four panelists told a group of college students the answer: an unequivocal "No." Hilary Doe, National Director of the Roosevelt Institute Campus Network, was joined by Greg Anrig, Vice President of Policy and Programs at TCF, Teresa Ghilarducci, the Bernard and Irene Schwartz Chair of Economic Policy Analysis at the New School, and Barbara Kiviat, a Staff Writer at Time Magazine. They teamed up to debunk myths about US debt, the economy, and prospects for the next generation.

How is the American Dream staying alive? As Doe pointed out, while the recession has in many ways hurt millennials the most, the difficulties they have lived through -- September 11th, Katrina, two wars, a recession -- have made them extremely innovative, entrepreneurial, and creative. They are also highly attuned to the need for strong communities. Both of these qualities mean that they have quite a lot at stake when Obama's Fiscal Commission threatens to cut programs such as Social Security. For this generation, being able to take risks with their careers is inextricably linked with a "robust" safety net, as Doe put it. And that net should look more like a trampoline that bounces people back to economic security, as a current Campus Network fellow recently told her.

But while the American Dream isn't dead, it does need support. Anrig pointed out that rising deficit concerns risk sabotaging the economy at a time when government spending is necessary to tackle unemployment. Ghilarducci noted that the Federal budget promotes the American Dream through direct and indirect ways, with discretionary spending and the tax code. The "backdoor" spending through tax expenditures isn't debated in Congress to see if they are efficient and effective (which they aren't). Rather than focusing on cutting social programs, these tax expenditures are the real place to look for cost cutting. If the focus turns to deficit reduction through the withering of social programs, it may be an American Dream deferred.

But the change doesn't all have to come from above. While millennials feel that the government has a role to play in lowering unemployment rates, they are, not surprisingly, distrustful of what it can accomplish. (Just take a look at how long Congress hemmed and hawed before extending unemployment benefits.) But Doe reminded the audience that actions at the local level can be a satisfying way to tackle the big debates over the deficit and unemployment. Movements such as neighborhood "stock markets", Move Your Money, ending food deserts and getting more preventable health care into people's homes tackle these problems. And they empower millennials on intimidating issues.

Meanwhile, Kiviat assured the audience that secular trends -- such as the rising use of technology -- will always trump business cycles, continuing the bright prospects for the American Dream. She did some research into the original American Dream, a term that was coined by James Truslow Adams in 1931 (which makes no reference to housing). His was a vision of a country where you can make your life what you want -- as long as you work hard for it. That dream, the panelists agreed, is still thriving.

Bryce Covert is Assistant Editor at New Deal 2.0.

Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.

British Prime Minister David Cameron's recent visit to Washington has revived interest in what is frequently called the "Special Relationship" between Great Britain and the United States. Many Americans may be familiar with the phrase, as it is often used to characterize the strength of the ties between London and Washington made manifest by the strong British commitment to the wars in Afghanistan and Iraq; by our joint struggle against international terrorism; and by the bonds of language and history, stretching all the way back to the birth of the Thirteen Colonies.

There is also a general awareness that the phrase is often used to describe the military alliance established by our two countries during the Second World War, symbolized by successful invasion of Normandy by British, American and Canadian troops on June 6, 1944.  Less well known is the fact that the "Special Relationship" can be directly tied to the wartime leadership of US President Franklin Roosevelt, who purposely sought closer ties with the British as a means to enhance and extend American military and economic power during the dark days of 1939-40 when the world teetered on the brink of the catastrophe that would become World War II.

Like any President, FDR's foremost responsibility was to maintain the security of the United States against possible attack. Given the threats posed by fascist Germany and Japan, the relative size of our armed forces in comparison with other states and the reluctance of  an "isolationist" Congress to authorize military expenditures in peacetime, this proved to be no easy task. Indeed, in June of 1939 the roughly 180,000-man US Army ranked 19^th in the world-smaller than Portugal's! To bolster America's security, FDR not only called for an increase in the size of the nation's military budget, and the repeal of the arms embargo provisions within the 1930s neutrality legislation, he also quietly sought to strengthen America's ties with Great Britain-the one nation whose combined military, political and economic strength might serve as a bulwark against a possible Axis aggression in the Western Hemisphere.

Given the United States' status today as the world's lone superpower, it is hard for most Americans to imagine a time when we might look to Great Britain and the Royal Navy as America's first line of defense; yet on the eve of the Second World War until well into the early 1940s, Great Britain's combined military strength exceeded that of the United States. FDR was well aware of this. He also understood that it would take time for the United States to catch up with her potential allies and adversaries. Hence one of the fastest and most efficient means for him to bolster America's security was to strengthen the ties between Great Britain and the United States.

FDR began this effort in June of 1939, with a much celebrated invitation to the King and Queen of England to visit Washington and Hyde Park-the first time a reigning British Monarch had set foot on American soil. This was followed some months later by his reaching out to Winston Churchill who was then First Lord of the Admiralty but was already being spoken of as a potential Prime Minister.  With the outbreak of war, and the disastrous events of May-June 1940, when France fell in a matter of six weeks, FDR was strongly advised by his Chief of Staff, General Marshall, and others not to place America's stock in Great Britain and to concentrate all of his efforts and resources in strengthening America's armed forces.  But FDR refused to adhere to this strategy. If anything, the fall of France and subsequent victory of the Royal Air Force in the "Battle of Britain" served to strengthen his determination to continue to support and establish closer ties not only with the United Kingdom, but also with the British Commonwealth. In August 1940, he concluded the Ogdensburg Agreement with Canada, linking the security of both nations and establishing what would become the Permanent Joint Board of Defense. One month later, at the urging of now Prime Minister Churchill, who reciprocated FDR's desire to establish closer ties, he signed the famous destroyers-for-bases deal, where the United States agreed to supply the Royal Navy with 50 out-of-service US destroyers in exchange for the US right to establish American Naval bases on British territory in Newfoundland and the Caribbean.

As the war progressed the links between Britain and the United States became even stronger, through the lend-lease program; the creation of such institutions as the Combined Chief of Staff; and the joint efforts of both powers to create a new post-war strategic and economic order through the drafting of the Atlantic Charter; the establishment of the International Monetary Fund and the World Bank; and the creation of the United Nations. This is not to say that serious disagreements over policy and military strategy did not come up during the war-they did. Moreover, by the end of the war, it was clear to all concerned that the seemingly unlimited economic power of the United States-which by 1945 had placed over 16 million American men and women under arms, developed the first atomic bomb, and built the largest Navy and Air Force the world had ever seen- had rendered it the unequivocally dominant partner in the alliance. But the wartime amity and respect established between the British and American peoples and governments, symbolized by the close personal friendship that developed between FDR and Churchill, would endure. Shortly after the war Winston Churchill reflected on this, noting that a "Special Relationship" had developed between the two peoples.

Today, as we look back at the events of the past 70 years, and the strong support the United States has received from Great Britain during the Cold War and in our struggle against international terrorism, it seems clear that Churchill's observation was correct. We have had and will continue to have our differences over specific policies, but on balance the British and the American people share a remarkably similar world view. It is for this reason that issues such as what role BP may or may not have played in the release of convicted terrorist Abdel Baset Al Megrahi in 2009 will not break the Special Relationship, for the outrage many Americans feel over this potential travesty is widely shared among the British press (that broke the story) and public.

The American people would do well to remember this. They would also do well to remember that it was an American President-at perhaps the most vulnerable moment in American history-who initiated the Special Relationship in an effort to save not only the United States but modern civilization as we know it. Thanks to the stalwart courage and determination of the British people, who refused to give in to Hitler, FDR's decision to extend a hand across the Atlantic proved to be the right one.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

Henry Liu demonstrates why FinReg, however well designed, cannot be counted upon to prevent future market failures.

A rule of finance: All trading models buy safety by externalizing risk to the trading system.

There is an invisible, but solidly anchored assumption in all structured finance and derivative trading models -- namely, that a systemic collapse would trigger a government bailout. Since each and every derivative trading model derives protection by externalizing risk to the trading system, systemic risk expands automatically (making systemic meltdown inevitable). Institutions, then, have an incentive to be considered of "systemic significance" in order to secure a fail-safe advantage in interconnected transactions, even though by themselves they are not "too-big-to-fail". These trading models are operative when they are marked-to-model, but inoperative when they are marked-to-market in a downturn. This is the point when these models' fail-safe strategy by government bailout is activated.

Even a government like Hong Kong, which assumes a radical laissez faire posture, has had to intervene directly in the equity market because of the connections between a fixed exchange rate and unregulated financial markets that allow manipulators to attack its equity markets by rigging the automatic effect of exchange rates on interest rates to create deflationary pressure on stock prices.

As you will see, focusing on "too-big-to-fail" alone leave windows of vulnerability for "too-connected-to-fail" hazards.

Hong Kong Monetary Authority Fought Off Hedge Fund Attacks in 1997

In October 1997, three months after China recovered Hong Kong following a century and a half as a British colony, the HK$, which had been pegged to the US$, came under powerful, repeated, speculative and manipulative attacks due to the contagion effects of the Asian financial crisis. The automatic monetary adjustment forced interbank interest rates in Hong Kong to shoot up to unprecedented levels (up to an astronomical 300% at one point), reflecting substantial risk premiums on the HK dollar. This generated severe deflationary consequences for the financial and property markets, as well as the entire economy.

The interventionist role the Hong Kong Monetary Authority (HKMA) played in handling violent market turbulence was controversial by the standard of its own free market ideology. HKMA later admitted that as Hong Kong's link mechanism was on "autopilot" during the attacks, the interest rate adjustments were part and parcel of the working of a currency board regime, and therefore generating an inevitable and painful financial crisis. The fact that such financial and economic pain was avoidable by de-pegging was not officially acknowledged as an option.

Hong Kong was the target of speculative and manipulative attacks four separate and sequential times during the Asian financial crisis of 1997. The first three attacks took the form of garden variety currency dumping, whereas the fourth attack targeted the structural vulnerability of the Hong Kong's currency board regime after speculators were convinced that HKMA would defend the peg at all cost. And speculators were waiting to be the happy recipients of guaranteed profit from HKMA's fixation on the peg.

The first attack took place in October 1997, as a result of contagion from the regional financial turbulence that began in Thailand in July 1997. Currency speculators took large naked short positions against the HK dollar, with the expectation of profiting from the breakdown of the Hong Kong linked exchange rate regime. However, interbank interest rates soared in response, forcing speculators to unwind their naked short position as the high cost of borrowing made leveraged naked short trades unprofitable.

Although the automatic defense mechanism inherent in the currency board regime prevented the breakdown of the currency peg, the penalty took the form of unsustainably high interest rates. For example, the overnight interbank interest rate on October 23, 1997 reached as high as 500%. This local interest rate volatility echoed the external market volatility, created psychological shocks to market participants that forced the market to put a risk premium on Hong Kong dollars. Consequently, local banks increased their precautionary demand for liquidity, resulting in continuing high level of interest rates for the HK market. A liquidity crisis developed, further exacerbating already abnormally high interest rates.

This high interest rate anomaly incurred huge adjustment costs in the Hong Kong economy, particularly in the finance, business and property sectors. Labor costs, even though they accounted for only about one-third of the operating expenses of an average corporation in Hong Kong, as compared to the US average of two-thirds, had to be reduced by management through lay-offs and cuts in real wages and benefits in the early 1998. Asset prices such as land, real property and company shares, together with rental and dividend income, also plummeted sharply and swiftly.

The high cost of defending the currency peg system manifested itself in severe price deflation. It triggered further speculative and manipulative attacks in January and June, 1998, each time draining substantial wealth from Hong Kong companies and residents into offshore hedge fund accounts. The monetary defense mechanism successfully maintained the currency peg in the market at the cost of generating sharp, across-the-board price deflation in the economy.

The Hong Kong dollar continued to trade at the pegged exchange rate to the US dollar, but the same US dollar was buying more assets in Hong Kong than before the crisis. The currency board regime merely deflected currency devaluation toward asset deflation. The exchange value of the HK dollar remained fixed to the US dollar, but Hong Kong asset prices and wages fell. It would be less painful to the local economy if asset prices and wages remained unchanged while the HK dollar was devalued against the US dollar.

The HKMA was able to defend the fixed exchange rate of its currency because it had large foreign reserves, but it did so by allowing wealth to be drained from the Hong Kong economy through asset deflation, weakening its market fundamentals. The net economic outcome was negative on balance. The monetary operation was successful, but the economic patient was left near dead.

In August 1998, the fourth and near-fatal attack took place, targeting at the automatic adjustment mechanism of the Hong Kong currency board regime. This took the form of simultaneous attacks on money and equity markets, known in hedge fund tactics as a "double play".

In a double play, before launching attacks, manipulative traders would pre-fund their attacks with highly leveraged positions with HK dollars in the debt market, engaging in big swaps to access large sums in HK dollars that multilateral entities had raised through their bond issuance. Speculative and manipulative traders then spread rumors about imminent Chinese yuan devaluation and a pending collapse of the Hong Kong equity and property markets. At the same time, they made large naked short positions in the stock futures index market. Then, they induced an interest rate hike by dumping their pre-funded HK dollars in the spot and forward market to force the HKMA to buy HK dollar with US dollars from its reserves. All these actions induced the Hang Seng index to plummet sharply and abruptly, from 16802 in June 1997 to 6708 in August 1998. Within three days beginning October 20, 1997, the Hang Seng index dropped 23%.

As the Hong Kong stock market started to plunge, other speculators saw opportunities for profit through massive naked shorting. The Hong Kong financial markets fell into chaos, as further naked short selling created panic selling of shares in free fall.

The Damage by Naked-Short Attacks

The current ban against naked short selling by Germany during the 2010 EU sovereign debt crisis is driven by more than mere phantom fears. The German defensive measure has the 1992 experience of the British pound and the 1998 experience of Hong Kong dollar with naked short selling as cautionary guides.

During the Asian financial crisis of 1997, speculators and manipulators exploited the automatic interest rate adjustment mechanism of the currency board regime, turning speculation into manipulation for certain profit. Hedge funds took naked short positions simultaneously in the Hong Kong stock and futures markets. Simultaneously, they sold yet-to-be-borrowed Hong Kong dollars against the US dollar. Under the currency board regime, the HKMA must stand ready to buy back HK dollars released into the market to maintain the peg.

This was the structural dilemma inherent with the currency board regime. On the one hand, continuing buybacks of HK dollars by the HKMA automatically shrank the Hong Kong monetary base and drove HK dollar short-term interest rate up sharply. On the other hand, the overnight interest rate having risen sharply to 500% at one point in October 1997, triggered precipitous drops in stock and stock futures prices and produced hefty profits for short-sellers. After every attack, market confidence plummeted further by the hour, creating an imbalance of sellers over buyers to push share prices further down.

The HKMA feared Hong Kong's economy could very well bleed to death if the downward vicious cycle was permitted to continue. If the economy should die from hemorrhage of wealth, no further purpose would be served by preserving the currency board. And if the downward asset price spiral was allowed to continue, the currency board would eventually also collapse after the large foreign reserves was exhausted, because wealth was draining from Hong Kong with no stop loss limits.

It soon became clear that the option was not even to choose between letting the economy collapse and letting the currency board regime collapse. The two are linked so that as one sinks, the other would be dragged down with it. The economy must be saved along with the fixed exchange rate. Yet few acceptable options were available to reverse the trend of depleting foreign currency reserves while bleeding the equity market dry. Among all the unpalatable options available, only two stood out with some uncertain promise: 1) outright capital control and 2) direct market intervention. Both were not cost-free silver bullets.

Malaysia's Capital Control Not Operative for Hong Kong

While earlier in the 1997 Asian financial crisis, Malaysia had adopted capital control with positive results, Hong Kong would not benefit from similar measures because, unlike Malaysia, the Hong Kong economy was primarily an outward-oriented trading economy with no sizable domestic market of its own. Hong Kong therefore chose direct market intervention with its huge foreign reserves. When manipulative and speculative attacks intensified again in August 1998, the HKMA intervened with its reserves of US dollars simultaneously in the money, stock and futures markets, in addition to buying back Hong Kong dollars in the foreign exchange market.

During the last two weeks of August, 1998, the HKMA imposed temporary penalty charges on targeted lenders that served as settlement banks for the manipulators and speculators to make speculative funds more expensive while HKMA itself bought US$15 billion worth of Hang Seng Index constituent stocks (8% of the index's capitalization). In addition, it took naked long positions that pushed the stock futures 20% higher to squeeze the naked short sellers. After the massive market intervention by the HKMA, the exchange rate of the HK dollar quickly stabilized, and currency futures and short-term interest rates returned to sustainable levels. Manipulator and speculators were left licking their wounds but not until substantial damage had been done to the Hong Kong economy. To soften anticipated neo-liberal criticism, the HKMA labeled its market intervention as "market incursion".

Still, for this unprecedented "market incursion", the HKMA received harsh criticism for deviating from its long-standing "positive nonintervention" policy. In defense, the HKMA argued that the "incursion" was justified by Hong Kong's strong economic fundamentals as well as the severity of the regional financial turmoil. The HKMA contended that without forceful incursion to foil market manipulation, not only would the currency board have collapsed but there would also have been serious regional and global ripple effects. It was a "too-big-to-fail" argument that was summarily dismissed by US neo-liberals who quietly did the same on a much larger scale in 2008.

The 1998 market incursion was a deviation from Hong Kong's economic policy of "Positive Non-Interventionism" adopted under British imperialism after WWII to appease US free market ideology. The policy was first officially implemented in 1971 by John James Cowperthwaite, a Scottish civil servant in the British Colonial Office who worked to remove all colonial government interventionist preference toward trade with Britain in order to facilitate more trade with the US, the world's biggest market with seemingly inexhaustible purchasing power.

Friedman Condemned Hong Kong for Market Intervention

Milton Friedman's opinion in the October 6, 2006 Wall Street Journal, less than a year before the global credit crisis that imploded in New York in July 2007, criticizing Hong Kong for abandoning Positive Non-Interventionism, praising instead Cowpertheaits as having been "so famously "laissez-faire" [in ideology] that he refused to collect economic statistics for fear this would only give government officials an excuse for more meddling." This is an amazing praise from Friedman who was known for his 1953 propositions for a "positivist" methodology in economics which stresses the important of economic data.

Hong Kong's Sin Repeated by the US

Notwithstanding their stern criticism of the HKMA in 1998, the Federal Reserve and the US Treasury also engaged in direct market intervention in US markets a decade later in 2008. This was done under the rationalization of saving "systemically significant" private institutions that were deemed "too big to fail". At least the HKMA bought all the listed shares in the Hang Seng index, rather than toxic assets from only selected distressed firms as the Fed and Treasury did, which was decidedly less evenhanded or market neutral.

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