Best of the Week
Most Popular
1.How U.S. Dollar Destruction Threatens the Global Economy - Steve Forbes
2.Why UK House Prices Will Continue Rising - 'It's Immigration Stupid' - Nadeem_Walayat
3. Bitcoin Price at Beginning of a Move up? - Mike_McAra
4.Gold Price to Plunge, Visiting Fort Knox - David_Hague
5.Silver Price Forecast - Metal to Gain Ground in August on These Factors - Jim Bach
6.Gold And Silver Will Rise With US Dollar Demise, Just Not Soon - Michael_Noonan
7.Bitcoin Price Strong Move Possible - Mike_McAra
8.Israel Gaza War Crimes - Soldier's Ordered to Shoot Civilians Including Children - C4News - C4News
9.UK House Prices Crash Warning - Daily Mail Cognitive Dissonance - Nadeem_Walayat
10.UK House Prices Boom - Top Quick Cheap Tips to Help Sell Your Home - Nadeem_Walayat
Last 5 days
The US Gold in Fort Knox is Secure, Gone, or Irrelevant? - 19th Aug 14
Bitcoin Price On The Brink of a Possible Reversal - 19th Aug 14
Why Tesla Stock Price Will Double in the Next 12 Months - 19th Aug 14
Europe's Economic Malaise: The New Normal? - 19th Aug 14
The Coming U.S. Economic Collapse Will Trigger a Revolution - 19th Aug 14
Market Bubbles, Bubbles Everywhere - 19th Aug 14
This is Your Economic Recovery With and Without Drugs - 19th Aug 14
Stock Market Strong Start to Jackson Hole Week - 19th Aug 14
Iraq, Ukraine - Oh, What A Tangled Mess We Weave - 19th Aug 14
How to Apply Moving Averages as a Trading Tool - Video - 18th Aug 14
Why Short Stock Traders Are Losing Money This Week - 18th Aug 14
Stock Market Rally May be Complete - 18th Aug 14
Why Chinese Citizens Invest In Gold - 18th Aug 14
Palladium Reaches 13-Year High Over $900 oz as Gold Trading Volumes Surge 66% - 18th Aug 14
Understand and Profit from Surging European Volatility - 18th Aug 14
No Escape from The Dollar as The Currency Standard - 18th Aug 14
Stock Market New Highs Less Certain - 18th Aug 14
German Stock Market DAX About To Drop - 18th Aug 14
Stay on Board - Stock Market Big Picture - 18th Aug 14
Europe Economy Is Tanking, QE Is Coming - 18th Aug 14
Are You Ready for The Greatest Technology Revolution Yet? - 17th Aug 14
Why King Coal is Bigger than Oil or Gas - 17th Aug 14
U.S. Empire of Death and Lies - 17th Aug 14
Ukraine - Whose Spin Are We Caught Up In Here? - 17th Aug 14
Time Decay And No Escape For Abenomics - 17th Aug 14
India BSE SENSEX The Party Is Over In Bombay - 17th Aug 14
Stock Market Uptrend Looks Underway - 17th Aug 14
The Key Role Of Conspiracy Theory In Dumbing Down Society - 17th Aug 14
The Federal Reserve in Denial Mode - Bond Market Explained - 17th Aug 14
Stock Market Ukraine-Triggered Volatility, But a Flat Finish - 16th Aug 14
Stock Market Investors Conditioned To Catch The Falling Knife - 16th Aug 14
Decline And Fall Of The CO2 Crisis - 16th Aug 14
Gold Stocks Major New Upleg - 15th Aug 14
Don’t Assume What Is “Unseen” Doesn’t Exist - 15th Aug 14
HUI, Gold and Silver; Fun With Monthly Charts - 15th Aug 14
Cry for Argentina: Fiscal Mismanagement or Pillage? - 15th Aug 14
New 'LBMA Silver Price' - Still Not Transparent - 15th Aug 14
America the Neighborhood Bully Recklessly Throws its Weight Around - 15th Aug 14
The Single Best Investment for the Semiconductor Tek Stock Boom - 15th Aug 14
The Something For Nothing Society - Inflation and Getting Paid NOT to Work - 15th Aug 14
Forecasting Ability of the Elliott Wave Principle - Trader Education - 15th Aug 14
The Most Hated Stocks Bull Market - 15th Aug 14 - Puru_Saxena
America's First Oil Sands Producer and Other Natural Resources Surprises - 15th Aug 14
Life and Times in Propagandistan - 15th Aug 14
The Biggest Lesson from Microsoft’s Recent Battle with the US Government - 15th Aug 14
Russian Bear Rattles Stock Markets, but Plunge Protection Team Rides to the Rescue - 14th Aug 14
Back In Iraq: We Only Want To Save You - 14th Aug 14
Learn How to Spot High Confidence Chart Trade Setups for FREE! - 14th Aug 14
More Bad News is Good News for the Stocks Bulls - 14th Aug 14
If Mr. Rogers Ruled Wall Street - 14th Aug 14
Government Spending and Negative Interest Rates - 14th Aug 14
Gold, Silver, Dow and VIX Market Updates - 14th Aug 14
Don't Get Ruined by These 10 Popular Investment Myths - 14th Aug 14
Gold and Silver Miners that Can Make Money Now - 14th Aug 14
Low and Expanding Risk Premiums Are the Root of Abrupt Stock Market Losses - 13th Aug 14
Stock Market at the Precipice - 13th Aug 14
When Gold Miners Have Already Rallied – Will Metals Follow? - 13th Aug 14
Oil Market QE Premium Is Coming out of Price - 13th Aug 14
Putin is Winning the New Cold War - 13th Aug 14
No Silver Money For Mexico, But Perhaps Gold For Eurasia - 13th Aug 14 -
Japan Economic Collapse - GDP Plunges by 6.8%! - 13th Aug 14
Confusion To New “London Silver Price” Launch This Friday - 13th Aug 14
Interest Rate Policy Global Divergence - Really? - 13th Aug 14
Stock Market Two-Day Rally Ends with a Small Loss - 13th Aug 14
Resources Stocks Where to Stash Your Money When Europe Heats Up? - 13th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

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