The Wall Street Journal Slams Larry Summers
Posted on July 29th, 2013 in Uncategorized | 24 Comments »
The debate over who should be the next Fed chair didn’t let up much over the weekend, which is primarily a function of Larry Summers’ recent status as the main contender; everything Summers touches gets hot-hot-hot.
On Saturday the Journal ran with a piece pointing out the conflicts of interest Summers has because of his buckraking (something he once said he would not do)—”Summers Faces Hit Over Potential Nod Because of His Wall Street Ties.”
The Journal reports that not only has Summers been working with hedge fund D.E. Shaw, investment group Andreesen Horowitz and wealth management firm Alliance Partners, he has also been consulting for Nasdaq and Citigroup (Bob Rubin’s old firm, surprise, surprise).
The recent financial crisis has focused attention on the Fed’s role—and shortcomings—as a financial regulator. The Fed has more direct oversight of and authority over big banks, including Citi, than any other regulator. Mr. Summers’s work for Citigroup is almost certain to be cited by critics suspicious of him for his advocacy of financial deregulation during his years in the Clinton administration, where he served as Treasury secretary. Some critics say the recent financial crisis had its roots in deregulatory efforts.
In an editorial today the Journal slams both Summers and competitor Janet Yellen, the latter on the basis of her support from advocates who think Obama should choose a woman. This is slightly unfair, of course, as no one said a word about gender until Summers’ name started getting talked up, and Yellen’s qualifications are unassailable. And the Journal takes aim at Summers again.
Citibankers will consider it a bargain if their man ends up running the agency with primary responsibility for regulating Citigroup. In the Dodd-Frank world, too-big-to-fail banks are public utilities that resist regulatory advice at their peril. If he returns to the heights of financial political power, Mr. Summers wouldn’t forget who helped him build a comfortable nest egg.
This is absolutely true. But it’s also true that Summers wouldn’t need to be on Citigroup’s payroll to be looking out for its interests. The Bob Rubin connection alone would suffice, but the truth is, Summers has been a shill for Wall Street dating back to the financial crises of the 1990s, when he and Rubin, at Treasury, consistently fought to get irresponsible banks repaid at the expense of millions of struggling and unemployed people.
Still, the Journal’s repeated attention to this theme is significant; the White House now knows that it does not have the Journal’s support for the choice of Summers.
Perhaps the smartest writing I’ve seen about Summers and the Fed appeared in Politico over the weekend. Economics blogger Mike Konczal details in this piece exactly what the Fed does and why that makes Summers the precise wrong choice.
The next chair of the Federal Open Market Committee, as the powerful body that controls the U.S. money supply is formally known, will face three major issues during his or her tenure. The first, and most urgent, is to determine how to navigate our economy out of the current doldrums. The second is to decide how aggressively to enforce the new set of financial reform rules that emerged from the financial crisis. And the third, crucially, is to find a way to rebuild monetary policy and the Fed so that the United States won’t see a repeat of the current crisis. Yellen is clearly the superior candidate on all three counts.
Konczal is particularly good on the Fed’s role in financial regulation and why its importance there should disqualify Summers.
The last responsibility of the next chair will be how to enforce the new rules of the financial sector. Summers’s role in the financial deregulation of the 1990s [is] widely known, as are his dismissals, as late as 2005, of those who thought financial innovation could increase the risks of the financial sector. But Summers has also been on the wrong side of many key debates more recently: He didn’t support a bankruptcy solution for the U.S. foreclosure crisis (after saying he’d fight for it to get Congress to vote for the second round of TARP). He was reportedly against including a ban on hedge fund like trading at our commercial banks — the Volcker Rule — during financial reform. Meanwhile, as finance blogger Bill McBride notes, Yellen was making the correct calls on the housing bubble and its potential damage.
Konczal gives a terrific hypothetical: The Fed will soon be deciding, singlehandedly and in private, whether “financial firms like Goldman Sachs can have large, extensive businesses in physical commodities such as aluminum.” (You will remember that the Times just found out that Goldman has been manipulating the aluminum market, costing consumers billions of dollars annually.)
Given Summers’ snuggly ties with Wall Street, which way do you think he’d lean?
The question, of course, is whether the President cares about all this anti-Summers backlash. One argument suggests that he does—why else float Summers as a trial balloon, if not to see what the reaction might be? The other argument is that the President wants to anticipate the reaction so that when he picks Obama, the White House knows how to spin the pick.
Either way, it’s the kind of situation where you really do think that the President has some serious blind spots…
24 Responses
7/29/2013 6:15 pm
@ SE
One of our favorite economists, Brad DeLong, has come out in support for Larry to replace Bernanke. What say you?
Slightly off topic. For the last four and a half years, I have argued with many many posters on this board about the debt liability incurred with the (long ago) proposed Allston expansion. I expressed the view that when Larry left in 2006, the position was slightly under water and should have been closed out because the project was abandoned. I argued that many people at Harvard made a very costly mistake in keeping open the liability, when no asset was to be created. Without exception, everyone who wrote about the subject (and there were many who wrote, almost all anonymously) said I didn’t know what I was talking about and, of course, I argued that they didn’t. There was so much misinformation posted and the idea that Larry caused these losses took on a life of its own. As recently as a few days ago, there were still people on this blog, including my friend Richard Thomas, who were holding Larry responsible. https://richardbradley.net/shotsinthedark/2013/07/10/larry-summers-in-the-lead/#comments
Now you can talk about many things that Larry got wrong and all his many other faults both at Harvard and in government, but he did not cost Harvard a billion dollars. Lots of other very smart people at Harvard who were charged with stewardship of the University were responsible for the loss. But hey, don’t take my word for it. Look at what one of the most respected economists has to say (hint: exactly what I said in late 2008 and have continued to say):
http://delong.typepad.com/sdj/2013/07/illegitimate-and-unfair-larry-summers-bashing-the-smart-and-thoughtful-matthew-klein-gets-one-wrong.html
7/30/2013 5:58 am
Sam—I think it’s a fair argument, though I do wonder if Larry before his departure was kind enough to say, hey, by the way, about those swaps…
The other thing that I think he gets unfairly blasted for is the toxic pollution memo; I’m convinced that he didn’t write it and signed off on it only in the spirit of academic open-mindedness. Not fair to wrap that one around his neck these days.
7/30/2013 10:39 am
Richard,
My wife has no idea whether Larry “was kind enough to to say, hey, by the way, about those swaps…”
Whether he did or did not remind everyone doesn’t and shouldn’t matter. Here is why. The Treasurer of Harvard (a member of The Corporation) and the CFO of Harvard, both sign the financial statements. The swaps were there, loud and clear. Did they sign without looking? The Harvard Debt Management Committee was also monitoring the swaps. And what about that august body aka The Corporation. You had some very astute financial people on that Board: a former director of The CBO; a businessman who ran a large successful company: a former Treasury Secretary, a former president of a large university who was surely familiar with university finances. Do board members not look at financials of The Corporation they represent?
It would have been nice if Larry had said something, but he was thrown out of the university and had no responsibility for anything after June 30, 2006. Others did have a responsibility.
Look at that chart that Brad DeLong presented. This is a perfect case where a picture is worth a thousand words (and a billion plus dollars).
Getting back to whether Larry should be the next Fed Chair. There are several reasons why he probably would not be a good chair and several reasons why he would. All have been covered in news stories. In one way, I’d like to see him as Chair. The next Chair is going to face a financial crisis unlike anything this country has seen. As two very astute investors (Seth Klarman and Jeremy Grantham) have pointed out recently, we are in the bubble of all bubbles. It would be interesting if Larry’s economic brilliance were tested to see if he could bring about an escape from disaster. I don’t believe he could, but in moments of fantasy, I think about the situation.
One last “Larry thing.” Interesting to see what happened to that professor from Harvard who headed south to New Jersey.
Recently spoke with two friends from that university who are “in the know.” Perhaps Larry wasn’t so far off base after all.
7/30/2013 10:44 am
Sam Spektor, you have got to be kidding me with your unsubstantiated sliming of Cornel West.
7/30/2013 11:02 am
I don’t reply to people who hide behind anonymity.
7/30/2013 11:07 am
Said the guy implying that his nameless friends possessed unspecified dirt on a person he couldn’t even bring himself to name.
7/30/2013 11:09 am
Also, not to be nitpicky, but I am posting pseudonymously, not anonymously, and I have been a regular, good-faith interlocutor here for years.
7/30/2013 11:15 am
Summers got “thrown out of the university,” Sam?
Someone should throw me out of the university on these terms (p. 12, 22):
http://www.tellus.org/publications/files/issue-brief-exec-comp-201109.pdf
NYTimes today seems on the mark:
http://www.nytimes.com/2013/07/30/opinion/choosing-the-next-fed-leader.html?hp&_r=0
7/30/2013 11:34 am
Cheap shot by any standard, Sam. Larry is what he accused West of being — a university professor, spending his time on outside activities rather than teaching and scholarship at Harvard. Except that Summers could not back up his claims about West. West has, of course, announced that is leaving Princeton to return to Union Theological Seminary.
7/30/2013 11:48 am
I guess I may have missed the real point, Sam. What was it about West that Larry thought and you have from informed New Jersey sources has proved to be true? Maybe you are referring to something else.
7/30/2013 11:53 am
Harry,
I don’t understand “I guess I may have missed the real point .” What is the “something else.”
7/30/2013 12:01 pm
You have inside information that Larry was right about West. About what? The main thing I remember of what Summers is alleged to have complained about (we have only West’s version) is that West was unproductive as a scholar and too involved in his outside activities. Since that was false of West but true of Summers, I am wondering if your knowledgeable sources are confirming something else Larry thought about West.
7/30/2013 12:17 pm
Harry,
Sorry if you thought it was a cheap shot. It was not meant to be. My sincere apology to you and mad @er.
As you said, Larry is what he accused West of, e.g. unproductive as a scholar, too involved in his outside activities. However, I wasn’t speaking of Larry.
I have no inside information. What I was implying was told to me by three people, whom I respect. They like Professor West. All three said that from their standpoint, and many others, he wasn’t all he was cracked up to be as a teacher and a colleague. That’s all I was implying. Have you talked with any Princeton students, professors or alums recently? This came out of the clear blue, but again, my apologies for even mentioning it.
Now let’s get back to Larry as Fed Chair.
Best,
7/30/2013 12:24 pm
Lots of professors are said to be cracked up to be this or that. That generally means they are celebrities and some people like them and others don’t. To be taken with a grain of salt in the absence of any other information.
I am working on another LHS piece, stay tuned.
7/30/2013 12:53 pm
Actually, Larry accused West of two other things: Being too political, which is, in retrospect, too funny. And sexual harassment—which was not only a gross accusation, but a false one. (It’s worth mentioning that Summers didn’t accuse West of this to his face—he just mentioned it at an off-the-record meeting with the NYT editorial board: “What would you do if you had a professor with a sexual harassment problem?”)
Summers also told West, “I want you to help me fuck Harvey Mansfield,” apparently because Mansfield was attributing grade inflation to affirmative action and Summers thought that this crude appeal would compel West to give lower grades. (Yes, the logic is tortured, don’t blame me.)
And Summers said that he didn’t want West to write so much for popular media (like, oh, the Financial Times).
And finally Summers accused West of spending too much time away from campus and not devoting enough time to teaching.
This is all detailed in Harvard Rules, by the way, and no one has ever challenged a single fact of my account of the Summers-West matter.
Sometimes you wonder if Summers has just a smidgen of self-awareness. I think not. Because if he did, how could he look himself in the mirror?
7/30/2013 1:33 pm
http://www.dailykos.com/story/2013/07/29/1227547/-Great-Larry-Summers-Joke-from-Digby
7/30/2013 3:27 pm
Thanks for the joke, Harry. And Richard B., you’re so right about Larry Summers’ lack of self-awareness. If we take all of his failings one by one and ask what the underlying problem is that unites them all, that’s the one I’d point to. It’s also why he can’t change. Lack of self-awareness is linked in his case to a lack of understanding of how others feel and think, and the combination is a disaster. That’s the real reason why he shouldn’t be in charge of the Fed.
7/30/2013 4:29 pm
RT,
With all due respect, unlike you, I think the NYT editorial that you referenced, is very far off the mark. It said nothing new, but is part of the NYT Keynesian outlook with regard to Fed actions, an outlook that has dominated the paper for the last five years.
When you see this statement: “And no one ever confirmed to the job has come to it with as deep a grounding in both the theory and practice of monetary and regulatory policy as Ms. Yellen would bring,” one sees how slanted the editorial is. No one has had as “deep a grounding in both theory and practice?” Really?
When day after day, the NYT extolls Dodd-Frank (which is a bad joke because it doesn’t get to the heart of reigning in Wall Street… it is mostly fluff, very little substance) and not admitting that the latter named person was a significant contributor to the 2008 crisis, I, and many others, can’t take the newspaper seriously.
What I am shocked, shocked about is the non response to Brad DeLong’s comments and chart. For four and a half years, you and many many others on this site have castigated Larry for the billion dollar loss in swaps. I’m not a recognized authority on anything so I don’t expect my comments to hold any weight against those who blame Larry for this debacle (even if they were very wrong).
Brad Delong, however, is a very well respected academic economist. Aside from Richard B’s comment, there has not been one other comment from the tens of people, including you, who have posted on this blog over the years, referencing over and over again “Larry’s loss of a billion plus.” Not one person! Shameful that no one is willing to say they were in error. Shameful, but somehow not surprising to me.
Best to you and Joan,
7/30/2013 5:13 pm
Reigning in Wall St.? Larry is sure good at that. Not sure he’d do a great job reining it in however (sorry, couldn’t resist).
De Long is interesting. I’m not sure I’ve opined on the swap loss (which i probably don’t understand), and rather mention above debt financing in Allston, and implicitly the overly ambitious way in which Harvard went at that in the early to mid-2000s while the libraries got zero % increases.
Best to you an Annie!
7/30/2013 10:41 pm
PS
Check out almost every comment on Brad Delong’s slight preference for Summers, a puzzling slight preference on the available evidence on character, temperament, record
http://delong.typepad.com/sdj/2013/07/a-slight-preference-for-larry-summers-to-be-federal-reserve-chair.html#comments
7/31/2013 12:05 am
Indeed, RT, it seems like Delong is already slightly walking back that post (perhaps in response to comments) in his post on the Fed today: http://delong.typepad.com/sdj/2013/07/cardiff-garcia-already-strong-case-for-yellen-strengthens-further.html#more
7/31/2013 8:37 am
More required reading for Obama on HuffPo:
http://www.huffingtonpost.com/harry-r-lewis/larry-summers-conflict-of-interest_b_3679160.html
8/1/2024 4:14 pm
hates sour cream and likes Michigan? what a bastard
8/2/2024 4:01 pm
Here is an old one on the debt swaps. I no longer know what to think about this, which is not really central to my own worries about LHS.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHQ2Xh55jI.Q