Friday, July 26, 2013

The Summers of our discontent

Jason Linkins @ Huffington Post:
Way way back at the end of this period of time that we like to call "the 1990s," Time magazine featured Alan Greenspan, Robert Rubin, and Larry Summers on its cover and called them "The Committee To Save The World." And that was basically the moment that put the American economy on the Darkest Timeline. Somewhere, out there, there is a parallel universe where Brooksley Born, Sheila Bair, and ... I don't know, let's say a bottle of sriracha were appointed to the same committee, and there, the economy is humming and Elizabeth Warren didn't even need to run for Senate.
How did that work out?

In the intervening years since the Frio Trio were plastered all over your dentist's office, Greenspan has been forced to admit that his overarching theories were kinda-sorta all cocked up. Rubin ... well, he at least fell into a swimming pool at a big Wall Street to-do at the 2012 Democratic National Convention, in the most cosmically just thing that has ever happened at a political event. But Larry Summers has proven to be the sort of dread beast that even Ash Williams couldn't send off to a spectral dirt nap. Now, it is being rumored that Summers is atop the list of possible replacements for Ben Bernanke at the Federal Reserve.

Lordy, it was just 18 months ago that we were forced to ruminate on the possibility that Summers might end up leading the World Bank. At the time, the best (among many!) arguments against this came from Felix Salmon, who recognized that running the World Bank called for "a very high level of cultural and interpersonal sensitivity," and not, say, a high level of whatever personality traits lead one to opine, "I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable."
That said, one is forced to admit that being a charmless marl is no impediment to running the Federal Reserve. Fortunately, we can fall back on the wealth of Summersiana that's not related to his quirks of personality. (Though for the sake of all women, we'll nevertheless remember those as well.) Let's kick this to Barry Ritholz, for the opening verse: "He is essentially a smarter version of Alan Greenspan — only lacking Greenspan’s keen judgment, insight and humility (in case it escaped your notice, this is sarcasm )."

Ritholz goes on to Spotify all the hot tracks from the Summers discography: his overseeing of the passage of Graham-Leach-Bliley and the Commodity Futures Modernization Act of 2000, his approval of the Citibank/Travelers merger, and his overall encouragement of "concentration in the financial sector, thinking bulked up banks are a virtue" which led, inexorably, to "the rise of the TBTF institutions."

As Ritholz also points out, Summers was also a leader in the fight against regulating financial derivatives. This famous battle, in which Commodity Futures Trading Commission head Brooksley Born was taking the side of good sense, is chronicled in a Frontline documentary called "The Warning." (It includes the famous "13 bankers" scene that Simon Johnson referenced in the title of his 2011 book on the financial crisis.)

In another book, Ron Suskind's "Confidence Men," Summers is alleged to have criticized President Barack Obama to Peter Orszag thusly: "You know, Peter we're really home alone. There's no adult in charge. Clinton would never have made these mistakes."

But as far as Bill Clinton was concerned, it was listening to Summers that was the mistake. In a 2010 interview with Jake Tapper, Clinton said, "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 ... And the flaw in that argument, was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency.”

Summers has made more recent mistakes, however. Perhaps the most memorable was his fervent opposition to Paul Volcker, whose "Volcker Rule" would have helped to limit the ability of mega-banks to "invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit," as well as "place broader limits on the excessive growth of the market share of liabilities at the largest financial firms." It was Summers that provided the roadblocks to the Volcker Rule's implementation.

However, as Mike Konczal documents here, the most egregious of Summers' recent actions involves abandoning thousands of Americans struggling to stay in their homes after promising significant relief. Back in 2009, when opposition to releasing the second half of TARP funds arose in Congress, Summers authored a letter to congressional leaders making a commitment in exchange for votes on the TARP funds:
The Obama Administration will commit substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis. We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners. Banks receiving support under the Emergency Economic Stabilization Act will be required to implement mortgage foreclosure mitigation programs.
As Konczal notes, "this changed people's votes." He cites one rather dispiriting example, of Sen. Jeff Merkley (D-Ore.) explaining to his constituents that he signed on to release the second half of TARP specifically because he was promised that help for homeowners was on the way. "I have been immersed in the last several days talking with Rahm Emanuel, Larry Summers and Barack Obama," Merkley explained to a home-state newspaper, "trying to make sure this package will contain very vigorous effort to attack the foreclosure problem."

This was a promise that administration officials made to Konczal's face in a briefing, by the way. "I didn’t believe it," he wrote at the time, "we will see."

Well, Konczal at least kept his promise to check in later. Here's his salient excerpt of the December 2010 Congressional Oversight Report:
Finally, Treasury should accept that HAMP will not reach its original goals and provide a meaningful framework for evaluating the program in the future. Treasury continues to state that HAMP will expend $30 billion in Troubled Asset Relief Program funding, yet the Congressional Budget Office recently estimated that all of Treasury‟s foreclosure programs combined will spend only $12 billion. Given the Panel‟s cost estimates for Treasury’s other foreclosure-related efforts, HAMP thus appears likely to spend only around $4 billion. Had Treasury acknowledged this reality before its crisis authority expired, it could have made material changes to HAMP or reallocated the money to a more effective program. Now, that option is gone.
A key question, I guess, for future Larry Summers confirmation hearings, then: "What did you know about how likely it was that the promise you made was not going to be kept, and when did you know it?"

As I've noted, we've all taken a seat at the "Is Larry Summers about to get some plum appointment he couldn't possibly deserve" rodeo before, and watched as Summers did not get that appointment. Also on the list for Fed Chair is the current Fed Vice Chair, Janet Yellen, so we aren't wanting for decent alternatives.

It's very possible this sudden uptick in Summers rumormongering is just a trial balloon that been floated to gauge how people would respond to Summers' nomination. And I suppose we shouldn't discount the possibility that it's a trial balloon that's been floated by Summers' detractors to touch off a wave of hostility towards him. Either way, let us prick it.

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