Saturday, August 3, 2013

Larry Summers in charge of the Fed? Are you kidding me?

Larry Summers hard at work, as usual
With the likelihood of there being a new Chairman of the Federal Reserve in the very near future, everyone is offering opinions on who it should be. But the White House seems inclined to go with either Larry Summers or Janet Yellen, as Ezra Klein reports. Most Democrats in Congress are apparently in favor of the latter, though most commentators seem to feel Larry Summers has the edge, given that he was the President's selection to initially head the National Economic Council, has been Secretary of the Treasury (under Clinton), and even chief economist at the World Bank, along with also serving as President of Harvard University. Plus, I think there is little question that Summers very badly wants the job; he's likely been campaigning hard for it--behind closed doors--for years.

And he's a smart guy, says everyone in the room, everyone that knows him. Or as Paul Krugman once quipped, "Larry’s extremely smart—ask him and he’ll tell you." And those smarts have obviously earned Summers an impressive resume. So why shouldn't he take over for Bernake at the Fed? Indeed, the indomitable Steven Rattner has penned an extensive essay trumpeting Summers, his smarts and accomplishments. Let's look as some of the praise Rattner is heaping on Summers:
No one is perfect, but I score Larry’s batting average and qualifications at the top of the heap. There’s that extraordinary intelligence: the most brilliant, most analytical and most surgical brain of anyone I've ever encountered.
Batting average? What's that supposed to mean? His success rate with respect to himself or with respect to the people affected by his decisions? Because those are two very different things. Summers has certainly done well for himself, there's no question about that. But when he's been put in a position to make big decisions, I don't know that his history there is something he really wants highlighted.

From back in 2008--when Summers was in line for the Secretary of the Treasury job and was on the Obma transition team--Robert Scheer, who describes himself as a liberal, summed up some of Larry's past decisions quite nicely in an editorial for SFGate:
But it was Summers who most vehemently pushed for congressional passage of that drastic deregulation measure, the Financial Services Modernization Act, which eliminated the New Deal barriers against mergers of commercial and investment banks as well as insurance companies and stock brokers. Standing at his side as President Bill Clinton signed the legislation, Summers heralded it as "a major step forward to the 21st century" - and what a wonderful century it's proving to be.  
It was also Summers who worked in cahoots with Enron and banking lobbyists, and who backed Republican Sen. Phil Gramm's Commodity Futures Modernization Act, which banned any effective government regulation of the newly unleashed derivatives market. The result was not only a temporary boon to Enron, which soon collapsed under its unbridled greed, but also to the entire Wall Street financial community.
Aside from Chris Dodd, Barney Frank, and Charles Schumer, if there is one person who deserves to shoulder the most blame for the financial crisis of 2007-2008, that person is Larry Summers (while of course Joseph Stiglitz likes to pretend he saw the warning signs, but basically fiddled while Summers helped burn things down).

So how do these things impact Summers' "batting average"? No one is perfect, indeed.

But wait, Rattner has more effusive praise for Summers:
More substantively, I’d stack Larry’s judgments up against anyone’s. For example, he was way ahead of the curve on the dangers of allowing Fannie Mae and Freddie Mac to continue to run amok.  
"Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly," he said in a 1999 speech.
Great, he made a speech wherein he recognized the dangers of systemic risk. But how did he approach such issues in his professional life? Well, that speech was in 1999. In 2004, while Larry was the President of Harvard University, he pushed the board there to invest heavily--using the cash account--in high-risk products, including the swaps and derivatives that helped sink Fannie Mae and Freddie Mac, a move that cost the University dearly:
As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts. 
The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school said last week they will suspend work on the building early next year.
Of course, Harvard was hardly alone on this; lots of people and businesses took it on the chin. But the point is, Summers supposedly was "ahead of the curve" on the issue according to Rattner, yet when it came time to make a decision, he made the same kind of foolish, greed-inspired one that so many others did. Of course, he was long gone from Harvard when things went bad. By that point in time, he was busy helping to set up the Stimulus Bill, which of course failed miserably to do what people like Summers and Christine Romer said it would do.

There's a kind of pattern forming here, as I noted previously:
Summers takes over at Harvard, pushes for a course of action, then leaves before the foolhardiness of his recommendations become apparent. And then, Summers heads up the Obama Stimulus program, sees it forced down the nation's throat, then steps down before the abysmal consequences are fully realized. If one's goal is destroy a company, school, or nation via bankruptcy, it would seem that Summers is the man for the job.
Rattner would have us believe that despite this pattern, despite the realities of what Summers has done, he's still the man for the job, because apparently these missteps don't have much of an impact on Summers' "batting average." Right.

Incidentally, Rattner is quite forthcoming in the piece, insofar as he notes he is friends with Summers and has been so for a long time. You know who else Rattner counts as a friend? Jon Corzine. The man can sure pick 'em. Of course, Rattner has his own little bit of sordid history as the so-called "car czar" of the Administration, in charge of the GM bailout. Then, Rattner advised against an early selling of government-owned GM stock, a move that cost the taxpayers an additional two billion dollars--at least--and made the Administration look silly after it promised a "quick exit" from GM.

Rattner's praise of Summers is meaningless, both because it runs counter to the actual facts and because it is clear Rattner is just another member of the limousine liberal clique that walks the halls of Wall Street on one day and Capitol Hill on the next. In fact, Rattner's approval of Summers for the job of Fed Chairman is a pretty good reason--all by itself--to deny Summers the job.

Cheers, all.

No comments:

Post a Comment