Best of the Week
Most Popular
1.Gold Price Trend Forecast, Where are the Gold Traders? - Bob_Loukas
2.Stocks Bear Market of 2017 Begins? Shorting the Dow At its Peak! - Nadeem_Walayat
3.Betting on President Trump Leaving Office Early, Presidency End Date - Betfair Market - Nadeem_Walayat
4.Why Stock Market Analysts Will be Wrong About 2017 - Clif_Droke
5.Is This The Best Way For Investors To Play The Electric Car Boom - OilPrice_Com
6.Silver Price 2017 Trend Forecast Update - Video - Nadeem_Walayat
7.Gold Price Set For Very Bullish 2017, Trend Forecast - Austin_Galt
8.10 Things I learned From Meetings With Trump’s Transition Team - - John_Mauldin
9.How Investors Can Profit From Trumps Military Ambitions - OilPrice_Com
10.Channel 4 War on 'Fake News', Forgets Own Alt Reality Propaganda Broadcasting - Nadeem_Walayat
Last 7 days
The Mother of All Financial Bubbles will be Unimaginably Destructive when it Bursts - 19th Feb 17
Gold’s Fundamentals Strengthen - 18th Feb 17
The Flynn Fiascom, the Trump Revolution Ends in a Whimper - 18th Feb 17
Not Nearly Enough Economic Growth To Keep Growing - 18th Feb 17
SPX Stocks Bull Market Continues to make New Highs - 18th Feb 17
China Disaster to Trigger Gold Run, Trump to Appoint 5 of 7 Fed Governors - 18th Feb 17
Gold Stock Volume Divergence - 17th Feb 17
Gold, Silver, US Dollar Cycles - 17th Feb 17
Inflation Spikes in 2017, Supporting Gold Prices Despite Increased Odds of March Rate Hike - 17th Feb 17
Roses Are Red... and So's Been EURUSD's Trend - 17th Feb 17
Gold Trade Note Sighted - 17th Feb 17
Gold Is Undervalued Say Leading Fund Managers - 17th Feb 17
NSA, CIA, FBI, Media Establishment 'Deep State' War Against Emerging 'Trump State' - 16th Feb 17
Silver, Gold Stocks and Remembering the Genius of Hunter S. Thompson - 16th Feb 17
Maps That Show The US’ Strategy In Asia-Pacific - 15th Feb 17
The Trump Stock Market Rally Is Just Getting Started! - 15th Feb 17
Tesco Crisis - Fake Prices, Brexit Inflation Tsunami to Send Food Prices Soaring 10% 2017 - 15th Feb 17
Stock Market Indexes Appear Ready to Roll Over - 15th Feb 17
Gold Bull Market? Or was 2016 Just a Gold Bug Mirage? - 15th Feb 17
Here’s How Germany Buys Time From China - 15th Feb 17
The Stock Trader’s Actionable Guide to Trump - 15th Feb 17
Trump A New Jacksonian Era? The Fourth Turning (2) - 14th Feb 17
Stock Market Yet Another Wall Street 'Witch's Brew' - 14th Feb 17
This Is Why You Don’t Own A Lot Of Stocks - 14th Feb 17
Proposed Tax Reforms Face Enormous Headwinds - 14th Feb 17
BBC Inside Out Tesco Rip off Offers - Determined to Lose Big Spend Customers! - 13th Feb 17
Is the UK An Economy Built on Debt? - 13th Feb 17
Stock Market VIX Cycles set to Explode in March/April 2017 – Part 2 - 13th Feb 17
Stocks At Record Highs - Will Uptrend Accelerate? - 13th Feb 17
US Dollar: 'Rumors of My Death are Greatly Exaggerated' - 13th Feb 17
Is This The Top Commodity Play For 2017? - 13th Feb 17
Trump a New Jacksonian Era? - 13th Feb 17
Stock Market at High Tide - 13th Feb 17
Channel 4 War on 'Fake News' Ends - The New News Age - 12th Feb 17

Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

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

© 2005-2016 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

Catching a Falling Financial Knife