7 Reasons to Fight Obama on Picking Out-of-Touch Crony Capitalist Larry Summers as Fed Chair
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The Fed chairman is the most powerful official Obama will pick— directly affecting each and every wallet in America. As much as anything, this appointment will shape our country’s future.
Obama appears to want Summers, and so do the most powerful people on Wall Street. But he is not the people's choice. Democrats who care about ordinary Americans, like Sen. Elizabeth Warren, do not want to see him controlling of one of the two most significant economic levers in the country.
In leaning toward Summers, Obama, still a relatively young man with many years ahead, seems to be more interested in his own future than our future. The big banks will reward him for backing Summers. But the American people will not forget such a betrayal.
The legacy of the next Fed chair will last long after the President leaves office. Remember Alan Greenspan? He acted as Fed chief for nearly two decades. The next chair could potentially guide America’s economy for a generation.
We can look back on Greenspan's tenure and see the origins of many of the ills we now face, from inequality to high unemployment. If, down the road, we turn into an unstable, third-rate nation where regular people have lost faith in financial and justice systems and the rich retreat behind barbed wire, we may well look back and see in Larry Summers the genesis of that picture.
With so much at stake, let’s take a look at why all signs say that Larry Summers would be a destructive Fed chair unable to serve the people — one whose image as a serial looter of the American public no amount of whitewashing can clean.
1. Summers serves Wall Street over Main Street.
The Fed is responsible for the oversight and regulation of the US banking system. Larry Summers has a terrible record on both.
Alan Greenspan’s dangerous philosophy, vigorously supported by Summers during the Clinton administration, called for taking regulatory cops off the Wall Street beat and letting banks regulate themselves, which led to a culture of wild speculation and criminal activity that helped bring on the financial meltdown of 2007-08. As a result, millions of our friends, neighbors, and fellow citizens were left without jobs, homes, and pensions. In the wake of this devastation, Summers acted quickly to force American taxpayers to bail out the very banks which had triggered the devastation. Some deal!
Today, big banks are even more powerful and dangerous than before the crisis — they’re more concentrated, they’ve made record-breaking profits, and the news is a constant stream of scams and harmful activity ranging from money laundering to billion-dollar gambling losses to rigging international interest rates. U.S. Attorney General Eric Holder even admitted to the American people that the banks have become too big to be prosecuted without endangering the entire economy, a situation which not only makes a mockery of our justice system, but encourages banks to continue ripping off the public.
What has Larry Summers been doing since vacating his position as Obama’s top economic advisor? He’s been on what the New York Times called a “money-making spree” of consulting jobs, six-figure speaking gigs, and corporate board positions, collecting large sums from too-big-to-fail banks like Citigroup, giant hedge funds, and Silicon Valley financial firms. (He was already rich off Wall Street money before joining Team Obama: between his tenure at the Treasury Department in the 1990s and his 2009 return to Washington, the Times reports that his personal wealth rocketed from $400,000 to $31 million).
Obama’s support of Summers is a reflection of his own long history of support from Big Finance that goes back to his days as a senator, manifested in an inner circle stuffed with Wall Street veterans. As economists Laurence Kotlikoff and Jeffrey Sachs put it: “President Obama leans toward Summers not on the merits but because the Wall Street bankers want him.”
When you see a president acting to install the person favored by Wall Street’s most powerful players as Fed chair, you know that trouble on Main Street can’t be far off. We've seen this movie before; we know how it turns out.
2. He's the poster boy for crony capitalism.
The Fed chair, like the head of the Supreme Court, should have a sharp sense of when real and potential conflicts of interest come into play. When people in powerful economic positions lack this trait, things get ugly fast.
Case in point: On July 21, 2008 then-Treasury Secretary Hank Paulson gave Wall Street executives a potentially profitable heads up when he warned them of the government’s intention to nationalize Fannie and Freddie. He made that disclosure despite contrary statements to the Senate and to news reporters just days earlier. In the midst of a crisis, he knew who his friends were, and ordinary Americans weren't among them.
Would Summers act any differently? The record raises serious questions. While he was president of Harvard University, Summers could not restrain himself from working for a hedge fund to fatten his bank account. During that time he was also a member of the board of the Harvard Management Corporation, which oversees the investment of Harvard's large endowment assets. Summers famously urged heavier investments into stocks, private equity, and hedge funds — a move which cost the university dearly when the economy crashed in 2008.
And that’s far from the worst of it.
As Harvard president he protected his colleague and bosom buddy Andrei Schleifer from charges of clear conflict of interest in Russia that were pressed by the U.S. government. Schleifer, an economist, had been rolled into Russia as a consultant and decided that instead of giving sound economic advice, he would take the opportunity to line his own pockets. Investigative journalist David McClintock describes in gory detail how, in a breathtakingly corrupt deal, Schleifer and his wife defrauded both Russia and the U.S. government. The U.S. government sued and won against Harvard and Shleifer.
At the time, Summers testified that in his Washington experience, conflict-of-interest “issues” were “left to the lawyers.” On the matter of “ethics rules,” he admitted that “in Washington I wasn’t ever smart enough to predict them...”
The country does not need a Fed chair who, by his own admission, isn’t smart enough to predict conflicts of interest.
3. Summers is not terribly interested in unemployment.
Supporters of Larry Summers like to talk about his brilliance, but in reality he is a highly conventional economist who advocates raising interest rates too fast and places too much emphasis on deficits over jobs. Part of the Fed’s mandate is to move the country toward full employment, so Summers’ history of lackluster interest in jobs is yet another red flag.
Janet Yellen, Summers’ main rival for Fed chair, has consistently advocated for expansionary Fed policy focused on reducing unemployment. While out of power, Larry Summers has given lip service to the importance of jobs, but we’ve seen him in power enough times to know that jobs have never really been a major concern for him. Summers, the political protégé of deficit hawk Robert E. Rubin, the Treasury secretary under Clinton, has repeatedly shown — most recently during his years as Director of the National Economic Council under Obama — that if it comes down to a choice between jobs and austerity, he’s usually on the side of austerity. The kind of austerity that kills jobs and undermines programs like Social Security, Medicaid and Medicare.
Economist Dean Baker reveals that if you want to find the “smoking gun” in the Obama administration that led to a focus on deficit reduction instead of jobs, look no further than a memo drafted by Summers in December 2008, a month before Obama’s inauguration. The memo, which was wrong about the economy on several counts, set the stage for policies that drove an ongoing jobs crisis and led to Obama’s creation of a deficit commission led by former Senator Alan Simpson, a zealot for cutting Social Security and Medicare, and Morgan Stanley director Erskine Bowles. (The duo relied on famously discredited work by economists Carmen Reinhart and Kenneth Rogoff to push austerity).
Since he left the National Economic Council in 2010, Summers has been talking down austerity and talking up the importance of jobs and the middle class. But how he acts when in power and how he talks when out of it are two vastly different things. His doubtful record on adequately stimulating the economy and his political baggage are so worrisome that many — even some business-minded folks — have warned that his leadership at the Fed would be harmful to the economy. The Economist magazine has cautioned that Summers would likely be a Greenspan style "maestro" at the Fed, less interested in transparency and consensus-building in his decision-making than Yellen. In the NYT, Binyamin Applebaum explained that many financial analysts fear a Summers nomination "could lead to slower economic growth, less job creation and higher interest rates..."
Americans are still suffering from the effects of the Great Recession and years of wrong-headed economic policy. We need a Fed chair focused on unemployment and investing in the economy.
4. He's a blatant sexist.
Given the increasingly vital role that women play in the economy, clearly we need a Fed chair who respects them and understands that they are not second-class citizens.
The most famous case of Larry Summers’ sexism relates to his comments while president of Harvard suggesting that women do not have the natural faculties to do higher mathematics and science. Beyond this inappropriateness, there is also a smell of sexism in his dismissive response to Brooksley Born, who valiantly attempted to regulate derivatives trading while she was head of the Commodity Futures Trading Commission. At that time, a gang of male economists, Alan Greenspan, Robert Rubin and Larry Summers, worked overtime to silence her in a way that if not sexist, was at least egregiously mistaken and cost the American people horribly.
Obama claims to want diversity in his administration, but there’s a conspicuous absence of women in his inner circle. No woman has ever been chair of the Fed, but right now, a highly impressive woman, Janet Yellen, is on hand to do the job. As the first African American president, Obama has been a trailblazer. Does he really want his legacy marred by a tone-deafness to the need for qualified women in positions of authority?
There has been noticeable sexism in efforts to derail Yellen’s candidacy, despite her powerful resume. Her well-known cool head, dignified public persona, and demonstrated prescience on economic matters all serve to distinguish her from Larry Summers. It would be a slap in the face to both women and men to overlook an excellent female candidate in favor of a grossly unsuitable male one.
5. Summers had an ugly role in the Enron fiasco.
When Enron was manipulating California’s power market, creating stratospheric electricity prices and horrifying outages, Larry Summers was on the scene promoting the interests of the bad guys.
Kurt Eichenwald reveals in his 2005 book "Conspiracy of Fools" that in 2000, then-California Gov. Gray Davis suspected Enron’s involvement in the energy fiasco and pleaded for help to then-Treasury secretary Summers. Summers dismissed Davis’s concerns, and together with then-Fed Chairman Alan Greenspan, told Davis that the problem was really over-regulation and advised Davis to pipe down and not scare off Enron and other power suppliers.
Later, as the crisis raged on, Summers, Greenspan, and Enron CEO Kenneth Lay had a video call with Davis in which Summers praised Enron and suggested that what California really needed to do was loosen environmental regulations in order to quickly build more power plants.
Fortunately, Davis did not listen to Summers, and soon the world knew that his suspicions were correct: Enron had been running a gigantic fraud in California's energy market while its traders exchanged jokes on how they were stealing from poor grandmothers in the state.
The crime spree and subsequent implosion of Enron was a dress rehearsal for the financial crisis. Larry Summers didn't get it then that deregulation was a danger to the public, and there's no indication that he gets it now.
6. His environmental record is frightening.
A look at Summers record on global economic issues reveals both his disturbing attitude towards the world’s have-nots and his deranged thinking on environmental issues. While chief economist at the World Bank, he oversaw programs that hurt people throughout poor countries, requiring them to focus on repaying foreign debt over vital concerns like health and education.
Back in December 12, 1991, Larry Summers was chief economist for the World Bank and signed a famous internal memo that was leaked to the environmental community. The memo explained why dumping toxic waste in third-world countries would actually benefit them economically, suggesting that life and health are worth less in poor countries than in rich ones.
After the outrageous memo became public, Brazil’s then-Secretary of the Environment Jose Lutzenburger expressed his shock: “Your reasoning is perfectly logical but totally insane… Your thoughts [provide] a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional ‘economists’ concerning the nature of the world we live in…”
Later, during the Clinton administration, Summers set himself as an opponent to climate action and argued against the Kyoto Protocol to decrease carbon emissions. Under Obama, he continued to warn of potential economic risks of aggressive efforts to limit carbon emissions.
Understanding the threat of climate change and the impact of poisons and pollution on humanity ought to be givens for someone in a position as important as Fed chair. Summers' position reveals a great deal about his cast of mind and who he worries about.
7. He's an out-of-step Democrat.
On September 1, David Leonhardt of the New York Times reminded readers that a Democrat has not led the Fed in a quarter of a century. That is true, and this time the Fed chair will be a Democrat. But the question is, what kind of Democrat?
Larry Summers has been the kind of Democrat that helped move the party away from its core values and proud tradition of focusing on the needs of ordinary Americans. He is one of the key figures in the kind of Clintonian, “Third Way” economic model in which deregulation, regressive taxes, financialization and austerity hold sway. He is the sort of turn-coat Democrat who has jumped in bed with Wall Street and turned working class Americans away from the party they used to vote for (see: what’s happened in North Carolina). He is an elitist, completely out of touch with regular people, and obsessed with enhancing his personal wealth.
Notably, populist-minded Democrats don’t want him as Fed chair. Elizabeth Warren (Mass), Jeff Merkley (Ore.), and Sherrod Brown (Ohio) have all spoken out against him. The question is, how many other Democrats are willing to stand up and vote "no" on his nomination? How many will recognize that Larry Summers does not really represent the party? If enough Democratic Senators proclaim their willingness to filibuster Summers’ nomination, the costs to the White House of proceeding with it would rise exponentially. The President might even reconsider.
True progressives and liberals should let it be known what kind of a future they want for the country, and what kind of Fed chair they will get behind. If ever there were a time to fight, this would be it.