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.