Larry Summers and the End of Political Shame

Jonathan Kirshner

Larry Summers, campaigning to become the next Chairman of the Federal Reserve Board, has a rap sheet that would make Anthony Wiener blush. In the 1990s he led the charge for the deregulations that contributed to the financial crisis. In the 2000s, willfully blind to the growing systemic risk metastasizing throughout the banking system, he became a very well-paid consort of the financial sector (firms over which the Fed Chair is the ultimate supervisor).  With lines on his resume like “Enron Advocate,” and “villain of the Asian Financial Crisis,” Summers has a vast and remarkably robust reservoir of self-confidence, but no practical experience in central banking, a notable detail given that Fed Chair is not an entry-level position.

At the Clinton Treasury Department, Summers was the enthusiast of the rapidly growing, largely unsupervised, and enormously profitable markets in financial derivatives. Brushing aside reports from the Government Accountability Office that raised concerns about the risks inherent in such markets, Summers browbeat into submission subordinates who shared them instead of embracing regulatory reforms that might catch up with new developments. Working in concert with libertarian Svengali Alan Greenspan at the Fed, and friend-of-finance Senator Phil Gramm of Texas, he championed the Commodity Futures Modernization Act, which prohibited the government from regulating derivatives markets—including of course, the credit-default swaps that would play a central role in the 2007-2008 financial crisis. Before the crisis Summers boasted of this fiasco as “one of his great achievements as Secretary of the Treasury.”

During his ill-fated Presidency of Harvard University from 2001 to 2006, Summers’ enthusiasm for financial exotica never flagged. People still debate whether he is to blame for the reckless bets on interest rate swaps that cost Harvard’s endowment a fortune, but his continued cheerleading for the geniuses who had mastered a brave new world of riskless finance is beyond doubt. In 2005, when Raghuram Rajan, chief economist of the IMF, presented a paper that raised cautious concerns about the stability of the financial system, Summers led a chorus of cat-calls from the business-class seats. “We should not be lulled into complacency by a long period of calm,” Rajan argued. With a “myriad of complex claims written on the same underlying real asset,” small problems could quickly get out of hand, and “may create a greater (albeit still small) probability of a catastrophic meltdown.” He proposed some modest reforms. Summers derided the paper as “misguided” and dismissed Rajan as a Luddite.

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Fiscal Crises: Coming To A City Near You?

George DeMartino and Ilene Grabel

This week Paul Krugman used his influential column in the New York Times (NYT) to draw comparisons between the fiscal crises in Greece and Detroit (USA). In the essay, Krugman highlights the rhetorical parallels between the two crises. He argues that “deficit hawks” are misusing the Greek and now the Detroit crises in their continued efforts to lay the blame for fiscal crises anywhere and everywhere on fiscal profligacy and bloated public sectors. He is of course quite right about the misdiagnoses of these crises and the underlying political economy of the attack on the public sector.  (Though note that his emphasis on the “Schumpeterian aspects” of the Detroit and the Greek crisis really misses the point insofar as they involve far more than the failure of policymakers to adapt to inevitable changes in competitive advantage.)

There is much more to be said about the Detroit crisis. The sad fact of the matter is that Detroit suffers today from international trade and international financial policies of the past two decades that Krugman himself, and indeed many other leading international economists embraced.  It was not so long ago that leading international economists, Krugman included, advocated strongly for the North American Free Trade Agreement (NAFTA), the WTO, and just about ever other neo-liberal international agreement that came down the pike.  At the time the champions of neoliberalism ridiculed anyone who raised virtually any concerns about the agreements. Labor and human rights advocates, environmentalists and child’s rights advocates were branded as well meaning but ignorant, sanctimonious, or simply self-interested.

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Job Announcement: Researcher, Investment Agreements and Sustainable Development

Triple Crisis collaborators at the Global Development and Environment Institute (GDAE) at Tufts University seek a full-time Researcher with the institute’s Globalization and Sustainable Development Program. The main project of GDAE’s Research and Policy Program focuses on International Investment Agreements and Sustainable Development, with priority research on the food crisis and agricultural development, investment agreements and sustainable resource management, and the growing social, economic, and environmental impact of China and other emerging economies on Latin America. This is a wonderful opportunity for a researcher with an advanced degree in economics or a related field and with strong communications skills. The position is based at the institute’s office in Medford, Massachusetts.

See the full job description. To apply through Tufts University’s Human Resources system, click this link. Tufts is an equal opportunity employer, and the institute encourages people of color to apply for listed openings.

Detroit, Greece, and the Debt Crisis

The big news this week is that Detroit filed, or tried to, for bankruptcy. Some have compared the Motor City crisis to the European, and in particular Greek, crisis. And in the essential that is fine. Detroit is, like Greece has become, a sub-unit of a larger entity and does not control monetary policy. But the analogy does not help much in understanding the difficulties in Detroit.

There is an important difference that has always been part of the discussion of the European crisis, and that is that if you are unemployed in Michigan you get Federal unemployment insurance, and a series of other federal funds support the less privileged. Fiscal transfers are relatively large, and certainly larger than intra-European transfers. According to the Tax Foundation in 2011, federal aid corresponded to 36.4% of the Michigan revenues [not the highest, by the way, which was Mississippi with 49%].

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New Threat to State’s Economic Role

Martin Khor

Two new trade agreements involving the two economic giants, the United States and European Union, are leading a charge against the role of the state in the economy in developing countries.

Attention should be paid to this initiative as it has serious repercussions on the future development plans and prospects of the developing countries.

The role of the state, or of government, in development is a subject of long-standing and important discussion.

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Korea's Debt Mountain

Jayati Ghosh

SEOUL, the capital of the Republic of Korea, is now one of the “happening” cities of Asia. Psy’s “Gangnam style” (the pop music video that has gone viral online with more than 6 billion hits) that somewhat randomly celebrates the posh modern district of Gangnam is only one of various ways in which the city is supposed to reflect the new cool. There is growing recognition that this city is both vibrant and livable, with its vertiginous high-rise buildings coexisting with clean streets, fine new museums and spots that combine the natural beauty of its forested hills with carefully preserved (or reconstructed) palaces of the Joseon dynasty.

The evident sophistication and confidence of this capital city are relatively recent, indicating the material successes brought about by the much acclaimed and analysed “Korean economic miracle” that lifted a relatively poor economy into developed country status over the course of a generation. It is now recognised that this miracle was not a result of the operation of unfettered market forces. Rather, it was based on active state involvement in shaping the way private agents behaved. This economic success also had its dark side in the brutal dictatorship of Park Chung-hee (whose daughter Park Gyeun-hye was recently elected President). And both of these were enabled by the active support of Western (specifically United States) political and economic power.

This exemplifies the extent to which Korea’s turbulent and frequently tragic history has encapsulated the pulls and pushes of external forces, which outsiders frequently do not recognise. Korea’s history has been significantly driven from without, from the 7th century attempts at domination by the T’ang emperors of China to the Ming takeover of the 15th century to the tug of war between the Qing rulers of China and newly expansionist Japan in the 19th century. The subsequent 20th century division of the country into northern and southern sections was a reflection of the Cold War’s hottest moment. The Korean War in the 1950s, which split the country, was less an internally generated civil war and more the result of the desire of the conflicting foreign powers to maintain their own areas of strategic domination.

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Korea’s Debt Mountain

Jayati Ghosh

SEOUL, the capital of the Republic of Korea, is now one of the “happening” cities of Asia. Psy’s “Gangnam style” (the pop music video that has gone viral online with more than 6 billion hits) that somewhat randomly celebrates the posh modern district of Gangnam is only one of various ways in which the city is supposed to reflect the new cool. There is growing recognition that this city is both vibrant and livable, with its vertiginous high-rise buildings coexisting with clean streets, fine new museums and spots that combine the natural beauty of its forested hills with carefully preserved (or reconstructed) palaces of the Joseon dynasty.

The evident sophistication and confidence of this capital city are relatively recent, indicating the material successes brought about by the much acclaimed and analysed “Korean economic miracle” that lifted a relatively poor economy into developed country status over the course of a generation. It is now recognised that this miracle was not a result of the operation of unfettered market forces. Rather, it was based on active state involvement in shaping the way private agents behaved. This economic success also had its dark side in the brutal dictatorship of Park Chung-hee (whose daughter Park Gyeun-hye was recently elected President). And both of these were enabled by the active support of Western (specifically United States) political and economic power.

This exemplifies the extent to which Korea’s turbulent and frequently tragic history has encapsulated the pulls and pushes of external forces, which outsiders frequently do not recognise. Korea’s history has been significantly driven from without, from the 7th century attempts at domination by the T’ang emperors of China to the Ming takeover of the 15th century to the tug of war between the Qing rulers of China and newly expansionist Japan in the 19th century. The subsequent 20th century division of the country into northern and southern sections was a reflection of the Cold War’s hottest moment. The Korean War in the 1950s, which split the country, was less an internally generated civil war and more the result of the desire of the conflicting foreign powers to maintain their own areas of strategic domination.

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As Good as a Stopped Clock: The House Does Transparency

Frank Ackerman

One day in May, climate change got a lot more expensive. The price tag on emissions – the value of the damages done by one more ton of CO2 in the air – used to be a mere $25 or so, in today’s dollars, according to ananonymous government task force that met in secret in 2009-2010. Now it’s $40, according to an anonymous government task force that met in secret in early 2013.

Anyone who cares about combating climate change would have to applaud the result: a higher carbon price means that cost-benefit analyses will place a greater value on policies that reduce emissions.

And anyone who cares about democracy should be appalled at the process: are we entering an era in which major regulatory decisions are made anonymously, in secret, with no opportunity for review?

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What to Expect in TPPA Talks

Martin Khor

The nature and effects of free trade agreements has become a topic of public discussion, especially with the round of talks of the Trans-Pacific Partnership Agreement (TPPA) about to take place in Malaysia.

Not much is known about the TPPA drafts. But with some of its chapters leaked and available on the internet, and since much of the TPPA is likely to be similar to bilateral FTAs that the United States has already signed, we can have a good idea of its main points.

As can be expected, there are many contentious issues to consider, especially for developing countries like Malaysia.

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