Larry Summers Should Not Be the Next Federal Reserve Chairman

Email

Just this week, the Wall Street Journal reported that former Treasury Secretary and Harvard
President Larry Summers is "hell-bent" on becoming the next U.S. Federal Reserve Chairman.

The more important issue, however, is whether Americans should want Summers involved in such a prominent role in the global economy.

Arguments that favor Summers center on the fact that when the building clears out in 2014, Summers will be one of the few individuals left with significant experience in the international financial system. With Timothy Geithner gone, Ben Bernanke leaving in 2014, and departures of David Lipton at the IMF Michael Froman at USTR, Summers is considered one of the last "battle tested" individuals left. He has significant experience following the 1994 Russian crisis, the 1997 Asian Crisis and the 2008 Great Recession.

But while experience in necessary, so is the importance of accomplishments.

Critics have argued that handing the keys of the U.S. economy to Larry Summers would be equivalent to allowing a blind sheepdog to protect Americans from wolves. Summers' past 25 years of experience is riddled with questions about his ability to understand crisis, his commitment to corporate influence, and his irrational pledge to illogical academic arguments.

Given that few in Washington seem to vet political appointees of this administration, we decided to explore several important questions about Summers' potential candidacy and past understanding of the Federal Reserve's role in the global economy.

Up First, the Destruction of Brooksley Born

Perhaps the most damning case against Summers came during his role in deregulating the economy during his time as Assistant Treasury Secretary under Bill Clinton. Summers helped champion controversial legislation to repeal the Glass-Steagall Act, a Depression Era law that protected the economy by separating commercial banks from investment banks. Many people believe this repeal to be the most important underlying cause of the financial crisis.

But it was what happened just during the collapse of Long Term Capital Management in 1997 that should draw the most concern about his ability to foresee the consequences of policy. At the time, Brooksley Born, the director of the CFTC, argued that the government should provide greater regulation over OTC derivatives, the "financial weapons of mass destruction" that sank the U.S. economy in 2008. Born was a staunch advocate of increasing oversight to prevent Americans from the economic calamity they would ultimately experience.

Summers, with the help of Alan Greenspan and then Secretary Robert Rubin, dismissed her concerns and accused her of trying to cause a massive liquidity crisis just for releasing a "concept paper" about regulating derivatives. Summers argued that Born would facilitate "the worst financial crisis since the end of World War II" and that leading bankers were very upset about this potential oversight.

But we came to find out that if that were so, one should have concluded that even back in 1997, the banks were already doing something incredibly unreasonable with their derivative positions – after all Long Term Capital Management failed from improper oversight of off-balance sheet positions – the same positions Born wanted to regulate. Summers also called Born and told her regulation would reduce American competitiveness and that he was taking extensive heat from lobbyists… In the end, the story goes that Born was run out of town on a rail, and the U.S. still doesn't have strong regulation of the $1.2 quadrillion derivatives market.

Corporate Interests at Heart

The banks were not the only ones who benefited from Summers inability to grasp the concept that the derivatives markets were toxic.

At the beginning of the Enron debacle in California, Summers, Greenspan, and the disgraced Kenneth Lay were fervently arguing against then Governor Grey Davis that regulation in the state power sector were causing the significant blackouts from San Diego to Sacramento. Davis argued it was corporate tampering, but was convinced to limit environmental standards in order to "reassure the markets."

Much later, the U.S. would hear the audio tapes of Enron traders laughing as fires burned across the state and rolling blackouts continued. Of course, Summers was not involved in that, but we know now that Enron was in fact tampering with the state power sector. Enron was a major player in the derivatives markets in the late 1990s and early 2000s, leading up to their epic off-balance sheet liabilities that facilitated their collapse and doom. At best, Summers was duped by Lay, who died of a heart attack before serving what would have been a lengthy prison sentence, to assist in deregulating the California energy sector for Enron's own benefits.

Summers is a pure academic who seems to believe that markets are perfectly rational. His behavior and contempt for any form of financial oversight is ignorant to imperfections and human behavior. And that is the danger of his ideology, for he seems to believe that everyone in the sandbox is rational, when in reality, they are not. Summers frequently argued that government intervention causes "market distortions" which is entirely true. But market distortions are also caused by irrational actors like insider traders, rogue traders, or lobbyists who facilitate laws that raise leverage and thus market risk, or CEOs like Kenneth Lay.

The Stimulus Failed, But Let's Keep Spending

Summers was a Chief Economic Adviser of the Obama administration, but never seemed to understand that the definition of insanity is doing the same thing repeatedly and expecting a different result. The 2009 stimulus has failed to bring the promised unemployment rates down, but Summers will be a big spender in the Chairman role, highlighted by this very statement:

"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."

Translation: We need to continue the same insane economic policies in order to keep the music playing while the banks are able to keep this mirage of economic growth going. Pay no attention to the man behind the curtain… That's likely good news for the markets… until the country runs out of other people's money.

The reality is that Summers doesn't understand that this crisis was caused by irrational government policies that facilitated banks being able to act irrationally in the markets. Eventually the massive bubble, caused by the same forces that caused every other bubble, popped; yet men like Summers remain ignorant to global economic history.

Finally, About That Harvard Endowment…

During his time at Harvard, in the years preceding the financial crisis, the school had derivative positions of more than $3.52 billion of its endowment funding. Attributed to Summers, the school would pay nearly $500 million in termination fees to investment banks to exit these position and another nearly $500 million over 30 years. In the end, Summers lost the school about $1.8 billion, according to reports. How does one get this many chances and still be considered a genius by the people in power in Washington?

Again, his commitment to derivatives and misunderstanding of market forces seems to be concerning.

Some have argued that Summers is battle tested because he has worked in post-crisis environments before. The Obama administration is certainly wary that crisis could hit the European market, the Asian market, and the U.S. market at any time in the next three years.

But Larry Summers only reacts to crisis. He isn't capable of lifting his chin from his academic papers, and foreseeing storm clouds on the horizon.

Perhaps there are better candidates out there.

Join the conversation. Click here to jump to comments…

  1. Matt G | July 11, 2013

    Well said! it's so blatantly obvious that neither Summers nor Bernanke, for that matter, have even a child's grasp on the real workings of either macroeconomics or financial markets. What the U.S., indeed the entire world, needs is for someone who truly "gets it" back in the position of head cheese. Please, for the love of God, bring back Paul Volcker! Oh, and while we're at it, can we please coax Henry Kissinger out of retirement, too, to restore some sanity to foreign relations as well??

  2. Brad M | July 11, 2013

    I like the aricle. It makes some good points about Summers. Sadly though, it probably does not matter who is appointed as they will simply do the bidding of the banks and financial institutions who own the Fed and that also permanently hijacked our government and economy. The money the Fed has created through quantitative easing since 2008 ( about 2.5 trillion ) is monetary base and not monetary supply… in other words it is sitting in bank vaults unused and unloaned and not circulating through the system ( velocity ). The good news is it may have prevented worse than great depression deflation from occuring, or maybe not. The bad news is that amount of currency also has the potential to spark great inflation under the right conditions in the near future. There are some interesting paradoxes we are in.. since V=GDP/M and the Fed is rapidly increasing M, much faster than GDP is growing, V must continue to fall, our economic problem to begin with. Plus,there is a bit of a liquidity trap situation too, I rates at historical lows over the last few years with little activity economically considering the fact. Short run the Fed can stimulate the economic production, however it is very well prooven that long term, money creation does not stimulate growth…. if you continue to throw money at a stalled engine, you only make the money worth less and the engine poorer.The USA will either 1) experience inflation from the created money… though not hyperinflation as given the state of other world economies we could very well end up being the cleanest shirt in the dirty laundry basket, so to speak. 2) experience hyperinflation, though if this occurs then I will have to truly believe this was all done intentionally at that point. But it does not necessarily take hyperinflation to do the damage. Just imagine what 10-15 or 15-20 percent inflation annually over 4-6 years would do to this economy. 3)The monetary policy currently being tried will no longer be able to artificially push demand any longer and we fall into deflation… great depression, only worse this time… oh well, very painful, but that will absolve and whipe away a ton of debt very well ( as it did back then ), and all the banks and companies sitting on all this cash could then buy up the world on the cheap ( bad news ). This is probably what really should have occured naturally since 2007, with out the second part. 4) They will somehow be able to engineer a "franken economy" for another 10-20 years until fundamental changes occur that get the engine humming again… in other words more or less of what you have now for another decade or two.. with stagnant growth but no total collapse of economy or currency. But how at this point given the shear amount debt and unfunded liabilities the US has? Any way, who ever they select as Fed chair, hope they do not let us become the Weimar Republic. The Fed should not exist anyway. Good luck to us all.

  3. fallingman | July 13, 2013

    Summers isn't a fool. He's a fascist. Just follow the money trail and everything he does makes perfect sense. It's good to own a government and stooges like Summers. Just ask the bankers.

  4. Dusty | July 13, 2013

    It would seem to me to be prudent at this time of 're assignment' of what many of us consider to be an agency at the very heart of the monetary problems of the past century, and the boom/bust nature of our economy, THE FEDERAL RESERVE itself, to take this opportunity to CHANGE or OWN the LANGUAGE which might lead the general "thinking" population to "what's next"?

    My suggestion would be to change the 'name' of the office of 'fed chairman' to "pro tem chairman" of the Federal Reserve, BECAUSE this agency is going to be DISMANTLED and ABOLISHED in the very near term.

    Return the constitutional power of creation of "money" to Congress and the Treasury creates it, NOT a foreign association of banksters who won't stop until the goose is stone cold dead, and they have their bank accounts loaded and secreted away far from the roiling mobs who are left with cheese and macaroni.

    With the abolition of the Fed, goes the 16th Amendment and the FIT, which as we well know, funds ONLY the payment of interest on paper money printed by the Fed, not one DIME goes to payment of gov't services that we are told it is necessary for! (Grace Commission report, Ronald Reagan 2nd term).

    As long as we continue to put the expectations of the continuation of what has been, into the debate, such as "the next Fed chairman", CHANGE WILL NOT HAPPEN.

    The statement "Pro Tem Chairman-elect Roger Ferguson" works for me!

    If someone says "what do you mean, "pro tem"??!! I say, BECAUSE it is there to ASSIST and FACILITATE the ABOLISHMENT and DISMANTLING of the Federal Reserve system! Now let's get it done!

  5. Night Rider | July 31, 2013

    Both Summers and Yellen are banisters which we don' need–
    we need an anti-banister such as either Samantha Power or
    Elizabeth Warren — Both would work positively with President
    Obama and hopefully work with him to actually turn the Fed
    into a true Public Bank of the United States.

Leave a Reply

Your email address will not be published. Required fields are marked *


six − 6 =

Some HTML is OK