Best of the Week
Most Popular
1.Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK? - Nadeem_Walayat
2.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
3.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
4.Gold and Silver Price Ready To Go BOOM - Austin_Galt
5.Gold and Silver Potential Price Meltdown Scenario - Rambus_Chartology
6.Scottish Independence UK Catastrophe - The Balkanisation of Britain - Video - Nadeem_Walayat
7.The Price Of Gold And The Art Of War Part I - Darryl_R_Schoon
8.Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - Nadeem_Walayat
9.Heavy Gold and Silver Shorting is Bullish - Zeal_LLC
10.10 Year U.S. Treasury Short Best Place to be Remainder of 2014 - EconMatters
Last 5 days
Scottish Independence SNP Lies on NHS, Economy, Debt, Oil and Currency - 17th Sept 14
The Truth Behind the Dangerous "Helicopter Money" Delusion - 16th Sept 14
Central Bank Balance Bullying: Investor Implications - 16th Sept 14
U.S. Dollar and Gold Elliott Wave Projection - 16th Sept 14
The Origins and Implications of the Scottish Referendum - 16th Sept 14
The Collapse Of U.S. Silver Stocks As Public Debt Skyrockets - 16th Sept 14
Emerging Markets Are Set Up for a Crisis, What’s on Your Radar Screen? - 16th Sept 14
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14
Why ECB QE Is Bearish For Gold Prices - 15th Sept 14
Property Rights and Property Taxes—and Countries That Don’t Have Them - 15th Sept 14
Junior Miners Breaking Out Higher Forecasting Gold and Silver Price Bottom? - 15th Sept 14
Stock Market Patiently Waiting for Mean Reversion - 15th Sept 14
A Closer Look at the US Dollar - 15th Sept 14
The Silver Price Sentiment Cycle - 15th Sept 14
Stock Market Correction Underway - 15th Sept 14
Marc Faber - “I Want To Be Diversified, I Want To Own Some Gold” - 15th Sept 14
The Myth of Nuclear Weapons - 15th Sept 14
US Dollar Forecast to Go Much Higher - 15th Sept 14
Analysis And Price Projection Of The Uranium Market - 15th Sept 14
Bank of England Panic! Scottish Independence Bank Run Already Underway! - 15th Sept 14
The Ethics of Entrepreneurship and Profit - 14th Sept 14
The Big Investor Opportunity in the Orbital Space Junkyard - 14th Sept 14
Kohl's and The Rest of The Retailers are in Deep Doo Doo - 14th Sept 14
Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - 14th Sept 14
Stock Market Pullback Continues - 13th Sept 14
SNP Fanatics Warn of Day of Reckoning for Scottish Independence No Campaigners - 13th Sept 14
Scottish Independence Would Shake Up the Global System - 13th Sept 14
The World Order Becomes Disorder - 13th Sept 14
Is Geothermal Power About to Become The Next Great Battleground Over Fracking? - 12th Sept 14
Heavy Gold and Silver Shorting is Bullish - 12th Sept 14
Strong U.S. Dollar Undermines Gold and Silver - 12th Sept 14
Debt And The Decline Of Money - 12th Sept 14
Panic On The Streets Of London ... Can Scotland Ever Be The Same Again? - 12th Sept 14
Will The Real Silver Commercials Stand Up? - 12th Sept 14
If You Own Only One Investment, Make Sure This Is It - 12th Sept 14
Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - 12th Sept 14
Better Days Ahead For U.S. Stock And Housing Market - 12th Sept 14
U.S. Meddling Dims Prospects for Ukraine Peace - 12th Sept 14
Is the Fed Preparing to Asset-Strip Local Governments? - 12th Sept 14
China Holds “Gold Congress” - Positioning Itself As Global Gold Hub - 11th Sept 14
Fire Ice Could be Energy's Magic Bullet or a Planet-killing Catastrophe - 11th Sept 14
The Mass Psychosis Of 9 /11 Will Never Be Healed - 11th Sept 14
Radical Islam's Crisis of Competing Caliphates - 11th Sept 14
Ukraine Crisis And Self-Determination - 11th Sept 14
Cameron and Miliband Desperately Attempt to Prevent Scotland Committing Suicide - 11th Sept 14
A Supply Crunch Points to Higher Uranium Prices - 11th Sept 14
The Myanmar Shadow - 11th Sept 14
Europe Takes the QE Baton - 11th Sept 14
Full Frontal Inflation - 11th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Huge Stocks Bear Market

Should Larry Summers Replace Bernanke at the Fed?

Politics / US Federal Reserve Bank Jul 11, 2013 - 09:59 AM GMT

By: Money_Morning

Politics

Garrett Baldwin writes:Just this week, the Wall Street Journal reported that former Treasury Secretary and Harvard President Larry Summers is "hell-bent" on becoming the next U.S. Federal Reserve Chairman.

The more important issue, however, is whether Americans should want Summers involved in such a prominent role in the global economy.


Arguments that favor Summers center on the fact that when the building clears out in 2014, Summers will be one of the few individuals left with significant experience in the international financial system. With Timothy Geithner gone, Ben Bernanke leaving in 2014, and departures of David Lipton at the IMF Michael Froman at USTR, Summers is considered one of the last "battle tested" individuals left. He has significant experience following the 1994 Russian crisis, the 1997 Asian Crisis and the 2008 Great Recession.

But while experience in necessary, so is the importance of accomplishments.

Critics have argued that handing the keys of the U.S. economy to Larry Summers would be equivalent to allowing a blind sheepdog to protect Americans from wolves. Summers' past 25 years of experience is riddled with questions about his ability to understand crisis, his commitment to corporate influence, and his irrational pledge to illogical academic arguments.

Given that few in Washington seem to vet political appointees of this administration, we decided to explore several important questions about Summers' potential candidacy and past understanding of the Federal Reserve's role in the global economy.

Up First, The Destruction of Brooksley Born

Perhaps the most damning case against Summers came during his role in deregulating the economy during his time as Assistant Treasury Secretary under Bill Clinton. Summers helped champion controversial legislation to repeal the Glass-Steagall Act, a Depression Era law that protected the economy by separating commercial banks from investment banks. Many people believe this repeal to be the most important underlying cause of the financial crisis.

But it was what happened just during the collapse of Long Term Capital Management in 1997 that should draw the most concern about his ability to foresee the consequences of policy. At the time, Brooksley Born, the director of the CFTC, argued that the government should provide greater regulation over OTC derivatives, the "financial weapons of mass destruction" that sank the U.S. economy in 2008. Born was a staunch advocate of increasing oversight to prevent Americans from the economic calamity they would ultimately experience.

Summers, with the help of Alan Greenspan and then Secretary Robert Rubin, dismissed her concerns and accused her of trying to cause a massive liquidity crisis just for releasing a "concept paper" about regulating derivatives. Summers argued that Born would facilitate "the worst financial crisis since the end of World War II" and that leading bankers were very upset about this potential oversight.

But we came to find out that if that were so, one should have concluded that even back in 1997, the banks were already doing something incredibly unreasonable with their derivative positions - after all Long Term Capital Management failed from improper oversight of off-balance sheet positions - the same positions Born wanted to regulate. Summers also called Born and told her regulation would reduce American competitiveness and that he was taking extensive heat from lobbyists... In the end, the story goes that Born was run out of town on a rail, and the U.S. still doesn't have strong regulation of the $1.2 quadrillion derivatives market.

Corporate Interests at Heart

The banks were not the only ones who benefited from Summers inability to grasp the concept that the derivatives markets were toxic.

At the beginning of the Enron debacle in California, Summers, Greenspan, and the disgraced Kenneth Lay were fervently arguing against then Governor Grey Davis that regulation in the state power sector were causing the significant blackouts from San Diego to Sacramento. Davis argued it was corporate tampering, but was convinced to limit environmental standards in order to "reassure the markets."

Much later, the U.S. would hear the audio tapes of Enron traders laughing as fires burned across the state and rolling blackouts continued. Of course, Summers was not involved in that, but we know now that Enron was in fact tampering with the state power sector. Enron was a major player in the derivatives markets in the late 1990s and early 2000s, leading up to their epic off-balance sheet liabilities that facilitated their collapse and doom. At best, Summers was duped by Lay, who died of a heart attack before serving what would have been a lengthy prison sentence, to assist in deregulating the California energy sector for Enron's own benefits.

Summers is a pure academic who seems to believe that markets are perfectly rational. His behavior and contempt for any form of financial oversight is ignorant to imperfections and human behavior. And that is the danger of his ideology, for he seems to believe that everyone in the sandbox is rational, when in reality, they are not. Summers frequently argued that government intervention causes "market distortions" which is entirely true. But market distortions are also caused by irrational actors like insider traders, rogue traders, or lobbyists who facilitate laws that raise leverage and thus market risk, or CEOs like Kenneth Lay.

The Stimulus Failed, But Let's Keep Spending

Summers was a Chief Economic Adviser of the Obama administration, but never seemed to understand that the definition of insanity is doing the same thing repeatedly and expecting a different result. The 2009 stimulus has failed to bring the promised unemployment rates down, but Summers will be a big spender in the Chairman role, highlighted by this very statement:

"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."

Translation: We need to continue the same insane economic policies in order to keep the music playing while the banks are able to keep this mirage of economic growth going. Pay no attention to the man behind the curtain... That's likely good news for the markets... until the country runs out of other people's money.

The reality is that Summers doesn't understand that this crisis was caused by irrational government policies that facilitated banks being able to act irrationally in the markets. Eventually the massive bubble, caused by the same forces that caused every other bubble, popped; yet men like Summers remain ignorant to global economic history.

Finally, about that Harvard Endowment...

During his time at Harvard, in the years preceding the financial crisis, the school had derivative positions of more than $3.52 billion of its endowment funding. Attributed to Summers, the school would pay nearly $500 million in termination fees to investment banks to exit these position and another nearly $500 million over 30 years. In the end, Summers lost the school about $1.8 billion, according to reports. How does one get this many chances and still be considered a genius by the people in power in Washington?

Again, his commitment to derivatives and misunderstanding of market forces seems to be concerning.

Some have argued that Summers is battle tested because he has worked in post-crisis environments before. The Obama administration is certainly wary that crisis could hit the European market, the Asian market, and the U.S. market at any time in the next three years.

But Larry Summers only reacts to crisis. He isn't capable of lifting his chin from his academic papers, and foreseeing storm clouds on the horizon.

Perhaps there are better candidates out there.

Source :http://moneymorning.com/2013/07/11/larry-summers-should-not-be-the-next-federal-reserve-chairman/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014