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Wednesday, July 24, 2013

Clinton Admits He Was Wrong on Financial Deregulation But Larry Summers Never Has

     While I've never been a Larry Summers basher and I still tend to agree with both Matt Yglesias and Paul Krugman that he'd be very good as Fed Chairman I have to admit that the optics of Summer look bad. I mean imagine putting someone with a history of sexist comments about women's abilities over a woman with great ability, Janet Yellen. 

     "Summers would get the nod over the previous favorite, Fed vice chair Janet Yellen, in part because top-level officials have stressed to the president that Yellen is somehow “not strong enough” for the job, and would subsequently lack the confidence of financial markets. This gender-coded whisper campaign against the woman who would become the first female Fed chair in history is in line with an undercurrent of sexism about the selection — and the fact that Summers has an unfortunate history on this, from infamous comments he made while president of Harvard University (alleging there exist “innate” scientific aptitude difficulties for women) just amplifies the potential problem for the White House with its liberal base."

     http://www.salon.com/2013/07/24/sexist_larry_summers_will_destroy_the_economy/

     It seems to me one of two things are true about this choice:

     1. Yellen and Summers are two very qualified candidates to lead the Fed and either will do a stellar job. 

     2. Summers has some real 'blind spots' as Noam Schrieber puts it. 

     http://www.newrepublic.com/article/114009/larry-summers-fed-chairman-over-janet-yellen#

     He has a bad reputation of not working well with others-especially those who believes aren't his equal and the Fed is a very collegiate institution that requires consensus-for a Fed Chairman to get even 2 dissenting votes can be cataclysmic. 

    What's more, I have to say that while I tend to agree with 1, the Summers bashers make a compelling case. David Dayden:

     "The Fed’s biggest preoccupations at the moment are 1) whether to continue monetary stimulus to prop up an economy that remains ailing, and 2) whether to implement financial regulations from the Dodd-Frank Act in a way that is adversarial or friendly to Wall Street."

      "On the first count, Summers’ public statements on the economy since leaving the Council of Economic Advisers in 2010 have largely been confined to fiscal policy, something that would be out of his reach as Fed chair (and which is also stuck due to Congressional gridlock). For what it’s worth, the Administration is confident that Summers would take seriously the full employment mandate of the central bank. But sources close to the situation worry that Summers would be more likely than Yellen, an inflation dove, to prematurely pull back on quantitative easing measures, and more important, become accepting of the current high levels of unemployment, without experimenting on bolder measures. Inflation would remain the primary Fed concern, a benefit to bankers, rather than full employment."
      "Summers’ true position on monetary policy is more conjectural (actually a problem when putting someone into a position of running monetary policy). But there’s no question that, on financial regulation, Larry Summers has perhaps the worst track record of any major economic figure in America. And the Federal Reserve plays a key role, perhaps the primary role, in regulating banks. Led by point person Daniel Tarullo, the Fed has recently doubled leverage requirementsfor the largest financial institutions. It’s hard not to see the Summers pick as designed to babysit Tarullo, and blunt any policies that come down hard on the banks. Tarullo and Summers are personally close, but Summers typically listens to his own set of sources on financial regulation – the ones in the very expensive suits – and this has had disastrous consequences for over 15 years."

    He also points out that Summers unlike Clinton has had no second thoughts regarding the amount of bank deregulation in the 90s. Here is Clinton in 2010:
    "On derivatives, yeah I think they were wrong and I think I was wrong to take [their advice] because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. The money they’re putting up guarantees them transparency,” Clinton told me.
“And the flaw in that argument,” Clinton added, “was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency.”
The former President also said he was also wrong about understanding the consequences if the derivatives market tanked.  “The most important flaw was even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect a 100 percent of the investments, and indeed a 100 percent of the citizens in countries, not investors, and I was wrong about that.”

     http://abcnews.go.com/blogs/politics/2010/04/clinton-rubin-and-summers-gave-me-wrong-advice-on-derivatives-and-i-was-wrong-to-take-it/

     On the other hand, here's what Summers has to say with the privilege of hindsight:

      "In the 1990s, Summers and then-Treasury Secretary Robert Rubin led the effort to stop Brooksley Born from regulating derivatives, precisely the financial instruments that magnified the housing bubble and accelerated the financial collapse. Under his watch as treasury secretary, Congress eliminated Glass-Steagall’s firewall between commercial and investment banks, legalizing the merger of Citigroup (where Rubin would later become CEO). He further oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, even from state anti-gambling laws. Even Bill Clinton has apologized for deregulation of the riskiest sector in finance; Summers has not. Even well after the crisis, in 2011, Summerspronounced himself “more cautious than many about constraining financial innovation,” a not-so-thinly veiled code for encouraging a return to casino activity on Wall Street."

     No doubt about it. The more you think about it, the White House should listen to Krugman:

     "So what we have here are two highly qualified candidates, head and shoulders above anyone else I’ve heard mentioned and inconceivably better than the men who might have been in contention if that guy who ran with Paul Ryan had won. But if the final choice isn’t Janet Yellen, I think the president is going to have to offer a very good explanation of why not, or face a lot of grief from people who want to think the best of his administration."

      http://diaryofarepublicanhater.blogspot.com/2013/07/why-everyone-doesnt-love-larry-for-fed.html#comment-form

      Whether you agree that Summers is highly qualified or not-I tend to think he is, but if he isn't the answer is the same-Yellen is the choice. All this again, makes you think that Yglesias is on to something: this talk yesterday of Summers leading the pack may well have been orchestrated by Yellen supporters as all it;s done is show how many detractors Summers has and how much baggage he carries. If Obama goes with him now, then he must really, really like Summers, even more than is believed. 

10 comments:

  1. I think it should be "has" in the title, no?

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    1. Yes it should Tom! On the bright side, I did notice and change this before reading your comment. LOL

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  2. Not that the facts are going to matter to you but, the 'firewall' separating investment and commercial banking is still law; provisions 16 and 21 of Glass-Steagall (aka The Banking Act of 1933).

    All that was repealed in 1999 were sections 20 and 32, the affiliations provisions. Meaning that a holding company can now own both types of institutions (though their balance sheets have to be kept separate to prevent contamination of deposits by corporate securities). Corporate securities, not mortgage backed securities--which Glass-Steagall ignored.

    Something both Alan Blinder and Brad DeLong are aware of (you can look it up on DeLong's blog).

    Nor were derivatives de-regulated in 2000. Brooksley Born's power grab was denied--the interest rate and currency derivatives at issue were ruled not to be not a 'commodity' nor a 'future', and thus not under the Commodity Futures Trading Commission's authority. They were still regulated as banking and securities activities. Credit default swaps were pretty much unknown at the time.

    Don't bother to thank me.

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    1. Is there no conflict of interest in a holding company owning both kinds of institutions even though they're told to keep their balance sheets separate?

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  3. Patrick I'll save my thanks for when you can leave a single comment that doesn't drip with rank snark.

    I do appreciate the context in all honesty. However, saying that 'only' 20 and 32 were repealed may be the wrong way to put it.

    After all, there's the letter of the law and the spirit. An example of this is the recent SJC decision that weakened the Voting Rights Act.

    Now technically you can say that their decision doesn't actually end preclearance as Section 5 was not struck down 'just' Section 4.

    However, in effect-ie, in reality-Section 5 is pretty toothless without Section 4.

    No doubt a lot had already been done to weaken the partition before this but something major did change. I mean Citigroup basically formed in response to the repeal of 20 and 32-repeal made Citigroup, it wasn't possible before this.

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  4. Citigroup was allowed to keep Traveler's Insurance thanks to GLB. Had nothing to do with mixing investment banking and commercial banking.

    Btw, the five provisions of Glass-Steagall (out of 32 in the entire 1933 Bank Act) were themselves the results of the machinations of the Rockefellers and J.P. Morgan creating two cartels that each would lead in one; Investment underwriting and deposit banking. Sort of like the lobbying that went on backstage for Dodd-Frank.

    Except for the creation of the FDIC, which resulted from small regional banks lobbying Congressman Steagall. Which is the one provision people who worry about Too Big To Fail ought to think about repealing.

    Pretty much everything people think they know about Glass-Steagall is a fairy tale.

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  5. I am familiar with the machinations of the Rockefellers and Morgans. Nevertheless, proving that something didn't have an Immaculate Birth doesn't tell us whether it's a force for good or ill today.

    It seems to me that there are real conflict of interest issues in wanting to separate the two.

    R

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    1. Presumably you mean in joining the two. However, no sober economic historian accepts that the pre-Glass Steagall banking practices had ANYTHING to do with causing the Great Depression. As I've already pointed out that includes Brad DeLong, and Krozsner and Rajan;

      http://faculty.chicagobooth.edu/raghuram.rajan/research/papers/randy1.pdf

      There are plenty more where that came from. Stop wasting your time reading journalistic populizers like Wanniski, there's a whole scholarly world out there.

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    2. I don't just read Wanniski. OF course, I read Delong-and I've read a good deal of Friedman as well. Still Wanniski had a lot of inlfuence-as did Laffer.

      Are you denying that supply side economics-not Monetarism-is the dominant ideology of today's Republican party?

      In any case the topic at hand-Glass Steagall has nothing to do wtih Wanniski and I haven't formed my views on it based on him-as he wrote nothing about it.

      Actually, though he sounds very simliar to today's Republican party on the Depression. He claims that it was caused by tax hikes by Hoover and FDR and Smoot-Hawley.

      I disagree that he's not worth reading-I follow the sholarly world of course-but what I care about also is policy and often populizers have an untoward effect there. I obviously don't agree with him on lots of things but with the dominance of supply side in one party it's necessary to know about.

      As for your idea that ending FDIC is part of the solution I can't take this seriously it just sounds like extreme libertarianism. Bernanke-to name a scholar rather than a journalist-clearly thinks FDIC has been vital for modern financial stability-the ending of the time when bank runs and panics were things we had about once per decade.

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  6. Regarding the Depression, whatever Delong says was the main, proximate cause-and I assume his cause may be quite different than Rajan-he believes in the efficaciousness of FDIC for modern financial stability.

    I also doubt that he agrees that G-S wasn't a big improvement over the pre G-S era.

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