Paul Volker is right on target with his advice: banks must be held to safer and saner practices including being prohibited from trading risky securities. However, according to an article in today’s Business section of the New York Times, President Obama and his chief economic advisor Larry Summers are ignoring him.
Financial deregulation during the Clinton and Bush Administrations is one of the causes of the collapse of 2008. I have long suspected that Larry Summers is part of the problem and not part of the solution. (See my earlier post Tribalism undermines Wall Street reforms.) That suspicion was confirmed last night as I watched a documentary on Frontline on PBS. : The Warning: roots of the Financial Crisis of 2008.
Larry Summers and Timothy Geithner were understudies of Treasury Secretary Paul Rubin in the Clinton Administration. All three advocated leaving the derivative market secret and unregulated. They dismissed warnings and regulatory efforts by Brooksley Born, then chair of the Commodities Futures Trading Commission under Clinton. In shutting down her inconvenient truths and her intended regulatory actions—which would have spared us the banking collapse of 2008—Larry Summers volunteered to be the point man who personally demeaned and badgered her and ultimately caused her resignation. He deserves no quarter or pity.
In my opinion, Larry Summers is the economic equivalent of Donald Rumsfeld, arrogant, intellectually dishonest and cocksure of his own superiority. While President of Harvard, he said that women were under-represented in Academia due to a “different availability of aptitude at the high end.”
Both he and Geithner erred tragically (along with Greenspan who has since recanted) in shutting off pending regulation of derivatives 10 years ago. They have kept this abject failure hidden from the public. In the case of Larry Summers, his ego probably couldn’t take any admission of error, even to himself. So long as he is the President’s chief economic advisor, controlling discussions and access to the President, we won’t get the regulations we need. Sound thinkers like Paul Volker and Brooksley Born will continue to be ignored.
Changing economic an economic advisor in the middle of a crisis is difficult. It will take personal and political courage. Mr. President, you will have to admit to yourself that you made a mistake. However, Larry Summers is so bound up with his prejudices, ties to Wall Street, and his outlandish ego that the risk of keeping him on is far greater. Dump him and replace with Brooksley Born, Paul Volker or Sheila Bair. All are smarter and more honest. They are ready to work from data rather than from prejudices. Any one of these people would serve you and the American people far better than Larry Summers.
