Sunday, November 25, 2018

Larry Summers Bowed Out of the Race for Fed Chair: “Advise and Consent” Triumphant

On September 15, 2013, the White House announced that Larry Summers, Barak Obama’s prior chief economic advisor and a Secretary of the U.S. Treasury during the Clinton administration, no longer wanted to be considered to fill the upcoming vacancy as chairman of the Federal Reserve. In the announcement, Obama (or an advisor) wrote, “Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today.”[1] Unfortunately, this statement suffers from a sin of omission, which admittedly had been minimized by the media as well. Accordingly, the Democrats in the U.S. Senate who had just come out against a Summers nomination can be regarded as done the nation a vital service. Moreover, the “check” of the “check-and-balance” feature of the U.S. Senate’s confirmation power worked.
With all its open points of access, democracy can have a splintering effect on a point worthy of public debate. The media dutifully plays its “scattering” role before any reasoned train of thought can gain traction in the public domain. For example, at the time of Summers’ retraction, the New York Times reported that a “reputation for being brusque, his past comments about women’s natural aptitude in mathematics and science, and his decisions on financial regulatory matters in the Clinton and Obama administrations had made [Summers] a controversial choice.”[2] A reader could be forgiven for concluding that personal vendettas, public gossip, and single-issue (not even monetary policy!) political activists have points just as important as the matter of Summers’ past decisions on financial regulation.
Any political interest having succeeded in getting its point to a microphone is deemed just as relevant or decisive as any other. Democracy is the great relativiser. The great equalizer. Is rule by "members of the club" the only practical alterative, or is it American democracy merely its front, only superficially relativising and equalizing the relevant and the less-than-relevant?

       Alan Greenspan, Larry Summers, and Robert Rubin. In the late 1990s, they pressed Congress to keep financial derivatives unregulated. A case of government doing Wall Street's bidding?   Image Source:

Obviating the scattering effect, we can zero in on Obama’s attribution of “expertise, wisdom and leadership” and ask whether they apply to Summers when he joined Alan Greenspan and Robert Rubin in the late 1990s to lobby Congress to remove the CFTC’s authority to regulate financial derivatives. At the time, Brooksley Born, chairwoman of the CFTC, was recommending to Congress that mortgage-backed derivatives be regulated. That the unholy triumvirate, blessed by Clinton and supported by Wall Street, succeeded with the help of Sen. Phil Gramm in discrediting Born kept the financial system vulnerable to being blind-sided by a collapse in any of the securitized derivatives markets.
It is difficult to fathom how financial regulatory expertise, wisdom, or leadership could possibly pertain to Summers in his lobbying capacity during the Clinton administration, even if he did go on to help Obama mop up the fiscal thaw after Lehman's bankruptcy. Yet, sadly, Summers’ down-right discraceful bullying of Born, and being wrong on top of that on whether financial derivatives should be regulated were barely mentioned in the public discourse leading up to Summers’ decision to withdraw his name from the president's consideration.
Fortunately, the public can rely on the informed advise and consent power of the U.S. Senate. Is it just a coincidence, however, that bullish financial markets answered Summers' decision? Or was it the other way around: Summers' decision being the answer to a message he had received from Wall Street?
To be sure, Summers was "generally considered to be in the pocket of Wall Street."[3] Citibank had been paying him for what the Federal Reserve refers to as "participation" in "Citi events."[4] Additionally, his efforts to keep financial derivatives, including CDOs, unregulated enabled Wall Street banks to make "kazillions of dollars."[5] However, bankers have short memories, given the inertia of the financial interest of the moment. Traders and bankers tended to favor Yellen, according to a poll conducted by CNBC; whereas Yellen got 50 percent, Summers came in at a mere 2.5 percent.[6] Besides sporting an abrasive (Harvard?) manner, Summers had given vocal hints that he might tighten monetary policy, even reduce the Fed's bond-purchase program sooner than Yellen would.
Particularly given Summers' nature, I have trouble believing that he woke up one nice fall morning and decided to cave in to anticipated "political obstacles" to his getting confirmed by the U.S. Senate. Put another way, more was likely behind his loss of support among Democrats on the Senate committee than even concerns the senators might have had about Summers' prior participation in turning Congress against Born's plea to regulate derivatives. Could it be that Wall Street CEOs were pulling the strings, reaching from Boston to Capitol Hill without even leaving finger-prints?    

1. Annie Lowrey and Michael D. Shear, “Summers Pulls Name from Consideration for Fed Chief,” The New York Times, September 15, 2013.
2. Ibid.
3. Mark Gongloff, "Larry Summers' Withdrawal from Fed Race Is Good News for Wall Street and the Economy," The Huffington Post, September 16, 2013.
4. Reuters, "Fed Contender Larry Summers Cancels Citigroup Events," CNBC, September 14, 2013.
5. Gongloff, "Larry Summers."
6. Mark Gongloff, "Wall Street Overwhelmingly Favors Yellen Over Summers for Fed Chair: CNBC Poll," The Huffington Post, July 26, 2013.