Paul Volker is right on target with his advice: banks need to be held to safer and saner practices including being prohibited from trading risky securities. Yet according to the article in today’s Business section of the New York Times, he is being ignored by President Obama and his chief economic advisor Larry Summers.
Financial deregulation is one of the causes of the collapse of 2008 and the hundreds of billions of dollars in bailouts. I have long suspected Larry Summers to be 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 Frontline on PBS: The Warning: roots of the Financial Crisis of 2008….. an hour long documentary well worth watching.
Larry Summers and Timothy Gethner were both understudies of Paul Rubin (another member of the Wall Street tribe) in the Clinton Administration. All three were advocates of leaving the derivatives market totally secret and unregulated…. in spite of warnings and efforts to regulate them by Brooksley Born, then chair of the Commodities Futures Trading Commission and in spite of the collapse of Long Term Capital Management because of its unregulated activities. In shutting down her inconvenient truths and her intended regulatory actions― which would have spared us the banking collapse of 2008― Larry Summers was 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. (It is he, who while President of Harvard said that women were underrepresented in Acadamia 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, and they have a vested interest in keeping their abject failure hidden from the public. In the case of Larry Summers, his ego probably can’t take any admission of error, even to himself. So long as he is the Presidents chief economic advisor, controlling discussions and access to the President, we won’t get the regulation we need and sound thinkers like Paul Volker and Brooksley Born will continue to be ignored.
Changing economic leadership in the middle of a crisis is difficult and a little risky. It will take personal and political courage, and admitting to yourself, Mr. President, that you made a mistake. But, 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 him with a Brooksley Born, Paul Volker, or Sheila C. Bair the FDIC chairperson, all equally smart and all more intellectually honest―ready to work from data rather than from prejudices. Any one of those people will serve you and the American people far better than Larry Summers as your chief economic advisor.
Edwin Lee
