Larry Summers, erstwhile Treasury Secretary and President of Harvard University, is in the news again. Ryan Grimm of the Huffington Post is reporting the President is considering Summers for the Federal Reserve’s top job, much to the consternation of virtually everyone outside the hedge fund community. Back in May, I wrote a piece when Summers was rumored to be in the running for the job, and I feel that the piece is even more relevant given the president’s apparent desire to ruin the economy even more by appointing Larry Summers to chair the Fed. After all, when you’ve destroyed your university’s endowment, gambled its cash reserves on derivatives, ensured that derivatives would remain deregulated so your friends could gamble at 40:1 leveraging, why not move on to managing our monetary policy next? What could possibly go wrong?!
Without further adieu, I give you Larry Summers: Failure will get you everywhere, printed below. The piece originally appeared on dustinstockton.com. Enjoy!
Larry Summers, former Treasury Secretary, chief economist of the World Bank, and President of Harvard, is rumored to be the replacement for Ben Bernanke over at the Federal Reserve. God save these United States if he is, for Summers has a record of failure and gaffes to serve as indisputable evidence that he is the one man who could do a worse job than Ben Bernanke as Chairman of the Federal Reserve.
First, there’s the history of gaffes. Summers once signed his name to a memo authored by a junior economist under him at the World Bank. The economist, Lant Pritchett, wrote a seven page memo dated December 12, 1991, which recommended in part that more pollution be directed to developing countries. That section of the memo was later excerpted, condensed down to a page, and leaked to the press, where it caused a furor:
DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low-cost. I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostate[sic] cancer is obviously going to be much higher in a country where people survive to get prostrate[sic] cancer than in a country where under 5 mortality is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.
The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.
Summers’s defense was that he had not carefully read what he signed, and Pritchett claimed that the section was intended to serve as a sarcastic critique of trade liberalization. Never you mind that Summers was the chief economist of the World Bank; he couldn’t be bothered to read the memo he affixed his name to, or to consider the possible ways in which the contents could be twisted to discredit the World Bank and trade liberalization. That’s exactly what the sort of carelessness you want in a Federal Reserve chairman whose every word can influence the markets to swing wildly.
One might recall the example of former Treasury Secretary Paul O’Neill, who managed to roil the markets twice in his first 58 days with pronouncements that caused investors to think that the United States was rethinking its support for a strong dollar, and the Treasury Department was possibly closing out a program to buy back bonds. You don’t appoint one prone to gaffes as your Federal Reserve Chairman because it could lead to market catastrophe.
Summers also managed to speculate out loud that women lacked “intrinsic aptitude” which resulted in a lower proportion of women in high-end science and engineering positions:
“So my best guess, to provoke you, of what’s behind all of this is that the largest phenomenon, by far, is the general clash between people’s legitimate family desires and employers’ current desire for high power and high intensity, that in the special case of science and engineering, there are issues of intrinsic aptitude, and particularly of the variability of aptitude, and that those considerations are reinforced by what are in fact lesser factors involving socialization and continuing discrimination.”
Allow me to translate: women aren’t as good as men in science and math.
As irritating as Summers’s gaffes might be, and as dangerous at they might be in a position such as the Fed’s chairmanship, what is more troubling is Summers’s tendency to lose money for the institutions he oversees. Summers’s tenure at Harvard was defined by his insistence on using Harvard’s cash reserves to invest in the same risky batch of investments as Harvard’s endowment. Consequently, Harvard lost some $1.8 billion as a result of Summers’s decision to invest $3.52 billion in interest-rate swaps.
It could have been even worse, because Summers had pushed to invest 100% of Harvard’s cash in the endowment, but he was later talked into a paltry 80% investment of cash. Summers always had a thing for derivatives, dating back to his days in the Clinton Administration, where he pushed to tear down the walls between commercial and investment banking in order to allow banks to make ever greater bets on mortgage-backed securities and derivatives. The net result of Summers’s philosophy was Long Term Capital Management, where unregulated derivatives trades led to that firm’s collapse and an astonishing $4.6 billion in losses over a four-month period in 1998.
The result was a $3.625 billion bailout organized by the Federal Reserve Bank of New York, and the eventual liquidation of LTCM’s positions. $1.6 billion in swaps losses alone led to LTCM’s collapse, but Summers’s enthusiasm for derivatives was undiminished. Moreover, Summers demonstrated a tendency to marginalize dissenters during the lead-up to the collapse of LTCM that would define his later reaction to advance warnings of the most recent economic recession.
Commodity Futures Trading Commission chairwoman Brooksley Born pushed to regulate derivatives trades, but Summers and his mentor Robert Rubin, together with Fed Chairman Alan Greenspan, pushed back hard. Summers oversaw the passage of the Commodity Futures Modernization Act, which made any regulation of derivatives illegal. The Act even banned regulation of derivatives under state anti-gambling laws, and this near total exemption of regulation for derivatives would lead to the collapse of the economy near the end of the Bush Administration, as overleveraged banks and financial institutions confronted their inability to repay their bad derivatives bets.
One might think that losing $1.8 billion in cash, and overseeing policies that led to a $3.625 billion bailout and $4.6 billion in losses at LTCM over a four-month period was bad enough, but Summers’s legacy came to full fruition in the credit crisis that paralyzed the U.S. economy and led to the biggest bailout in the history of the world. All in all, the TARP bailouts, both in terms of the official TARP bailout and the backdoor bailouts by the Federal Reserve and other financial regulators, totaled $29.7 trillion.
Over $10 trillion in market capitalization vanished virtually overnight as the world’s credit markets froze, and the effects of the crisis are still being felt today. The U.S. economy still struggles under double-digit real unemployment, if you count the U6 unemployment statistic, and the real estate market isn’t coming back for average homeowners. The vast majority of the buyers in today’s residential real estate are investors and speculators using their access to quantitative easing to purchase up homes, a practice that prices ordinary homebuyers out of the market.
Just as Larry Summers stood against Brooksley Born when she objected to Long Term Capital Management’s leveraging of $5 billion into $1 trillion in positions, he stood against another individual who warned of the coming economic collapse. At a 2005 meeting of the world’s central bankers in Jackson Hole, Wyoming, the IMF’s chief economist, Raghuram Rajan, presented a paper warning of the economic crisis. Rajan highlighted the bonus structures and their incentivization of vast risks involving derivatives gambles, and warned of a “full-blown crisis” and a “catastrophic meltdown.”
Larry Summers responded by standing up in the audience and calling Rajan a Luddite, and excoriated virtually every point of his paper as wrong-headed. Within three years, Rajan would be vindicated, and Summers’s own positions would show as utterly wrong. Nevertheless, Summers returned to the White House with the Obama Administration as the director of the National Economic Council, where he, along with newly minted Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke, presided over a continuation of the same old policies that led to the economic crisis.
Indeed, as unemployment stagnated, the stock market soared with massive injections of quantitative easing. The contagion of sovereign debt crises and the derivatives used to hide sovereign debt for years in countries like Italy, Greece, Ireland, Spain, and Portugal threatened to collapse the European Union and implode the global economy again. It was no worry for Larry Summers, because he resigned his position as director of the National Economic Council in late 2010 to return to Harvard. Yes, the same Harvard that lost $1.8 billion on his derivatives gambles with the cash accounts.
He returned with his reputation for brilliance intact, even after his missteps on derivatives had resulted in nearly $30 trillion in bailouts, $10 trillion in vanished market capitalization, and $1.8 billion in losses to the university he oversaw. He managed to sidestep the blame for his role in ensuring the permanent deregulation of derivatives, which were never regulated to begin with, and largely unblemished despite the fact that he had been wrong when opposing Born and Rajan.
The fact that Larry Summers has any possibility of leading the Federal Reserve at all is a stunning testament to the fact that failure will get you everywhere in American politics. Despite the fact that the policies endorsed by Summers have led to spectacular losses for his employers, for the country at large, and for the global economy, he continues to move onward and ever upward. It’s not as if Summers doesn’t recognize his tendency towards mistakes; when queried about his signature on the World Bank memo, he responded with remarkable candor to the reporter who asked the question: “I think the best that can be said is to quote La Guardia and say, “When I make a mistake, it’s a whopper.’”
Indeed. With one whopper of a mistake upon another attributable to him, Larry Summers continues forward as a member of the faculty of Harvard. He’s a gaffe-prone economist with a stunning myopia who cannot tolerate any dissenting viewpoints, even when those viewpoints would save his institution billions of dollars, because Larry Summers firmly believes that he knows best in all situations despite the available evidence to the contrary.
Any other individual who disparaged the intrinsic ability of women scientists and engineers to explain away their lack of presence in high level science and engineering would likely find himself relegated to the scrap heap. Summers isn’t merely chauvinist; he’s serious. Combine those remarks with his tendency to sign memos he doesn’t read, especially when those memos advocate dumping larger amounts of pollution on developing countries as economic good sense, and Summers becomes even more mythic in his ability to survive. His record of losing money for employers, for advocating for reforms and policies that lead directly to economic cataclysms, and his unwillingness to recant a bit of his past positions in the face of present evidence that he was utterly wrong, ought to damn him to obscurity.
It doesn’t, because Larry Summers is living proof that failure will get you everywhere in American politics and regulatory regimes, so long as your failure is based on the right ideology. As long as your failures coincide with an ideology that allows a financial institution to leverage $5 billion into $1 trillion in positions, you can return to prominence even after disgrace. Failure will get you everywhere, as long as it is in service of the dominant sophistry of the day. Because of this, Larry Summers may be resurrecting himself yet again.
Jay Batman is a graduate of the Texas Tech University School of Law, where he attained his J.D. in May 2013. He completed a B.A. in English with a minor in Political Science at the University of Montevallo in 2002. He is employed with Dustin Stockton Political Strategies, LLC, and presently resides in West Texas with his dog and co-author, Buddy Love
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