Sunday, August 11, 2013

Considering the nomination of Larry Summers for Chairman of the Federal Reserve

“Every dog deserves two bites” - Admiral Chester W. Nimitz

Has Larry Summers already had his “two bites”? I would argue that yes, he has, and that he doesn't deserve any more. First bite is his role in the economic crisis that began with the collapse of the housing bubble in late 2007:

Not only did Summers work tirelessly during his years in the Clinton Administration to undermine regulatory and prudential controls in our financial markets, but he joined Fed Chairman Alan Greenspan and his political sponsor, former Treasury Secretary Robert Rubin, and public paragon Arthur Levitt, in smearing CFTC Chairman Brooksley Born so as to make the world safe for OTC derivatives.
“The moratorium was a huge victory for Wall Street,” Robert Stowe England writes in his new book, Black Box Casino.  “And a big win for Rubin, Summers and Greenspan,” though he rightly notes that Levitt later expressed regrets over his actions.

And as the economist Dean Baker puts it:

Summers played a major role in creating the economic imbalances that fostered the housing bubble and explain the weakness of the economy right up to the present. This is the problem of the huge US trade deficit, which was in turn caused by the over-valued dollar.

Second bite was his taking part on the Obama Administration to try and correct his earlier errors. In December 2009, Summers was interviewed and:

Summers cheerfully explained to George Stephanopoulos that the U.S. has “walked back from the brink” following the 2008 economic collapse, and that “everyone agrees the recession is over and the question is what the pace of the [job and economic] expansion is going to be.”  
Summers' cheerful diagnosis was grossly premature as there was still, as of July 2013, an unemployment rate of 7.4%, a rate that the current Chairman of the Federal Reserve described as “far from satisfactory.” 
The case that Christina Romer made for a stimulus larger than the $787 billion that was ultimately passed was missing from the proposal that made its way to the Presidents desk. 
At first, Summers gave her every indication that all three figures would appear in the memo he was sending the president-elect. But with less than twenty-four hours before the memo needed to be in Obama’s hands, Summers informed her that he was inclined to strike the $1.2 trillion figure. 
Summers' attitude was based on political calculations that may very well have been correct, but submitting the under-estimated proposal certainly robbed the proposal of much of the urgency that Romer quite properly felt that the President should feel. As we later saw, under-bidding was a poor political choice as the Obama Administration never got a second chance to go back and get more stimulus. 
So, having made two failed bites, does Summers present any further problems as the nominee for Chairman of the Federal Reserve? Yes, as a matter of fact, he does. To begin with
Summers is even less popular with Wall Street than he is with liberal bloggers and Democratic senators.

Former President Bill Clinton said about Summers and his advice on derivatives:

On derivatives, yeah I think they were wrong and I think I was wrong to take [their advice] because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. The money they’re putting up guarantees them transparency,” Clinton told me.
“And the flaw in that argument,” Clinton added, “was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency.”

We also might remember:

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

Summers ultimately cost Harvard $1.8 billion (Out of a $6 billion endowment) through bad investments in, among other things, derivatives. 
Summers, amazingly, wanted to invest 100% of the university’s cash in the endowment, and had to be talked down to investing a mere 80%. No wonder Meyer and El-Erian tried to talk him out of it: the Harvard endowment was never designed as a place to invest sums of cash which might be needed immediately. Instead, it’s designed to invest for the very long term, taking advantage of the higher returns on illiquid investments.
Summers was playing a high-risk carry-trade game with Harvard’s cash:

Did Summers display other ethical problems? Yes.

So why did Summers lose his job at Harvard? It was because of his protecting a buddy, a fellow economist at Harvard named Andrei Shleifer.
Shleifer got in trouble, and the U.S Government sued and won against Harvard and Shleifer.
Summers was good friends with this criminal, and used his position to protect him.
Summers said conflict-of-interest “issues,” in his Washington experience, were “left to the lawyers.” He said he was sensitive to “ethics rules,” but testified that “in Washington I wasn’t ever smart enough to predict them . . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

Are ethical issues still a problem for Summers? As a matter of fact, yes.

The Lending Club’s rates, says the Times, are apparently “higher than what was available at a credit union or other lenders.” And that’s not the only problem with the outfit:
But Sarah Ludwig, the co-director of the New Economy Project, a nonprofit in New York, expressed concern that the company did not verify all borrowers’ income and employment.
This shows incredibly poor judgment and out-of-control greed from someone who will be regulating businesses to see that precisely these sorts of things don't occur. Oh, and by the way, hey, and how is Summers with women? Ugh!

It does appear that on many, many different human attributes—height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability—there is relatively clear evidence that whatever the difference in means—which can be debated—there is a difference in the standard deviation, and variability of a male and a female population.”
The Boston Globe reported on the speech on January 17. According to The Globe, an MIT biologist who was in attendance walked out, explaining that if she hadn't, she "would've either blacked out or thrown up." And as The Globe made clear, the anger at the speech was about more than just what Summers said. Up to that point during his tenure, the percentage of tenured offers made to women by Harvard's faculty of Arts and Sciences had severely dropped. In 2004, only four of a total of 32 offers went to women, a result Summers called unacceptable. Following the speech, Summers faced a 218-185 no-confidence vote, and the lingering anger eventually led to his resignation in 2006. 

Is the opposition to Summers' appointment a hopeful sign of better things to come? We sure hope so
Next to former Clinton Treasury Secretary Robert Rubin, there is perhaps no more notable public official most identified with Third Way economics than Summers.
Occupy Wall Street seems like an minor event today, but if current trends continue in hindsight it is going to look like a turning point in American history. All across the country, opposition to the economic and political establishment and their order is growing. The same people who told us nothing could go wrong with bank deregulation and turning our economy from one of production and innovation to one of flim flammery and an ever growing list of financier's card tricks, are now under growing pressure from the discontent in the country.
Ten years ago ... even five years ago ... Summers would have been hailed and feted for his "keen insight" or whatever. Pundits would sing his praises. Everyone would vigorously defend him, from the president on down. CNBC would give us a glowing 1-hour documentary of his life and times. But now he's under fire.

There's also a good piece from Daily Kos imagining a contest between Hillary Clinton and Senator Elizabeth Warren (D-MA) for the presidency. Such a contest between two highly qualified candidates of the same color and gender would enable Americans to focus on the economic principles that Clinton and Warren represent. Third Way corporatism versus true populist progressivism. We need to see to it that Summers does not get to be Chairman of th Federal Reserve, but even more, we need to hold the Obama Administration's current economic philosophy up to the spotlight and to discredit it

Update: The President is gettin' all huffy and irritated and L'etat c'est moi about Democratic Senators who are questioning his choice for the Federal Reserve and feels they oughta just siddown and shuddup and give Summers a rousing cheer and vote him in.