Wednesday, August 7, 2013

Why We Should Worry about Larry Summers

In the whispering campaign that accompanies every big-time appointment in Washington, Lawrence Summers is now said to be favored by President Obama over Federal Reserve Vice Chairwoman Janet Yellen to succeed Ben Bernanke as Fed chairman. But if that is the president's desire—and he insists he hasn't made his choice yet—then Obama probably knows that he may end up fighting the biggest battle for a nominee since naming Chuck Hagel as his Defense secretary.
What is the main objection that critics in Congress and elsewhere have to Summers? It is certainly not the Harvard economist's formidable intellect, nor his middle-of-the-road views on monetary policy. Nor is it his considerable prowess and record as an economist or even his notoriously prickly personality. The complaints about Summers revolve more around questions of integrity and character—more specifically, his career-long inability to admit the serious errors he has made as a senior policymaker, even when they have been staring him in the face.
It is a disturbing record, in the eyes of many critics. Nowhere, of course, is the art of avoiding responsibility for one's actions so highly developed as in Washington. But even in the nation's capital, there are few more masterful practitioners of this art than Obama's former chief economic adviser. And that may be a worrisome characteristic for a man with his hands on the central levers of economic power, a post that, despite semi-annual congressional hearings, enjoys scant oversight.
And it is an issue that is almost certain to come up, in various forms, during confirmation hearings.
Consider, as evidence, Summers' op-ed in The Washington Post in March of last year, as economic growth lagged and criticism mounted that he had failed to push a big-enough stimulus measure on Obama in 2009. He began the piece, in Summers-like fashion, with a preemptive strike on all the critics who are saying that he failed the president with bad advice and bad policy. Summers wrote: "Economic forecasters divide into two groups: those who cannot know the future but think they can, and those who recognize their inability to know the future." In other words, Summers was saying, "It is utterly impossible to know what will happen to the economy in the future. The smart ones, like me, won't even try."
This appeared to be Summers' way of absolving himself for what critics were ticking off as a series of major mistakes: his failure to appreciate the dimensions of the economic crisis, to push for a large-enough stimulus and a deep-enough housing fix—and perhaps as well for the major errors he made in his previous incarnation as Bill Clinton's Treasury secretary, when he oversaw financial deregulation that set the stage for the worst collapse since the Great Depression.
Furthermore, Summers wrote, "such recovery as we are enjoying is less a reflection of the natural resilience of the American economy than of the extraordinary steps that both fiscal and monetary policymakers" – guys like him, that is – have taken. Summers then drew tightly around him the Olympian robes of the Harvard academic, urging Washington's policymakers not to withdraw the economic medicine he had administered.
Let's briefly remove those robes and have a look at the record underneath. In truth, during his nearly three years as Obama's chief economic adviser (as has been the case throughout his career), Summers was surrounded by more prescient, high-level naysayers who urged him to take more dramatic action, who did sense that the economy needed deeper fixes. The record shows that he dismissed them at the time, and then later on pretended their advice didn't exist.
Take housing. The mortgage market, though it is recovering, is still one of the biggest drags on a still-deleveraging economy, with nearly half of homeowners underwater a full five years after the financial collapse. Yet the record shows unmistakably that the same administration that shoveled hundreds of billions to the Wall Streeters who had fraudulently sold all those mortgage-backed securities has had little sympathy for mortgage holders who got shafted. Summers and Treasury Secretary Timothy Geithner avoided what was desperately needed: a "cramdown" that would have allowed federal bankruptcy judges to force banks to reduce mortgage balances, cut interest rates, and lengthen the terms of loans to help borrowers get out of trouble, National Journal reported last year. Even Obama's own housing secretary, Shaun Donovan, called it a "missed opportunity." But "Summers and Geithner didn't try, according to numerous sources who were involved in the discussions,"National Journal reported. "Instead, they sided with the financial sector, and the administration went quiet as Wall Street pulled out all the stops to kill cramdown in the Senate."
Then there was the stimulus. As Noam Scheiber recorded in his bookThe Escape Artists, because of Summers' underhanded efforts to mute Christina Romer, then the chairwoman of the Council of Economic Advisors, in the early debate, Obama was given the option of only a modestly sized stimulus and had "little reason to suspect that this amount was perhaps $1 trillion too small." And Romer was hardly the only economist who dared to peer into the future and pronounce the stimulus inadequate; among those who did at the time were Joseph Stiglitz and Paul Krugman. Even Harvard's Kenneth Rogoff, who advised John McCain in the 2008 campaign, was saying well before the 2008 election just how bad things were going to get.
Nor has Summers ever owned up to his responsibility for deregulation in the 1990s, which led directly to the financial disaster. In an extraordinary TV interview in January 2012, which Felix Salmon of Reuters and others have written about, Summers maintained precisely the same line he had previously taken: He couldn't see far enough over the horizon; the future was utterly unknowable. Summers said that when he sponsored the Commodity Futures Modernization Act in 2000—creating essentially a global laissez faire market in over-the-counter derivatives—credit default swaps hadn't even been invented yet. So how could he have known what was to come? "If you want to assign responsibility, if you take a market that essentially didn't exist in the 1990s, that grew for eight years from 2001 to 2008, and then brought on a major collapse, if you were looking to hold people responsible, you would look to … officials of the Bush Administration," he said.
In fact credit derivatives did exist, as Salmon writes, and plenty of people were worried about them. In post-2008 interviews, Summers sought to recast himself as a pro-regulation man. But in 1998 Summers called then-chairwoman of the Commodity Futures Trading Commission, Brooksley Born, and loudly ordered her to desist from a proposal for regulating over-the-counter derivatives. Born was eventually railroaded out of her job, and others, such as Arthur Levitt, the chairman of the Securities and Exchange Commission during the Clinton years, felt badly about it. Levitt too had gone along with the pillorying of Brooksley Born, but after the crash 10 years later he told me, "All tragedies in life are always preceded by warnings. We had a warning. It was Brooksley Born. We didn't listen to that." Levitt told other reporters they had made a mistake by quashing Born's ideas.
When Summers heard about such comments, he got upset with Levitt. Shortly after the November 2008 election, when Summers and Levitt were called into a meeting on the crisis with then-House Speaker Nancy Pelosi, the two of them were walking out of the conference room together when Summers quietly told him, "I read somewhere you were saying that maybe Brooksley Born was right.... But you know she was really wrong," according to someone who overheard the conversation, which Levitt later confirmed. "Her plan was no good. And we offered a different plan." In truth there had been no other plan, at least not one that anyone ever tried to enact.
Indeed, perhaps Summers' biggest liability was one that Obama himself didn't seem to fully understand at the time the president-elect appointed him in the fall of 2008: Summers was one of the authors of the titanic financial mess that Obama was now tasked with cleaning up.
Back in the '90s, Summers had pushed hard to open up capital flows around the world. He had fought against efforts to regulate swaps and other derivatives. He had backed the 1999 repeal of the Glass-Steagall law, permitting commercial banks to jump into risky investment-banking activities, as "historic legislation" that would "replace" Depression-era rules "with a system for the 21st century." At the Jackson Hole central bankers gathering in 2005, when University of Chicago economist Raghuram Rajan presciently raised questions about the growing risks in the financial system, Summers publicly ridiculed Rajan. Summers spoke of how much he had learned from Fed chief Alan Greenspan, the Ayn Rand devotee who believed that Wall Street financial firms could always be trusted to preserve the system, and then launched into an attack on Rajan, saying he found "the basic, slightly Luddite premise of this paper to be largely misguided."
In fact, Rajan's analysis was dead on. But Summers never acknowledged that, either.
The Wall Street Journal recently ranked more than 700 predictions made between 2009 and last year by 14 Fed officials on everything from growth to jobs to inflation. The economist who came out on top of the list? Janet Yellen.

No comments:

Post a Comment