The Plutocrats Are Living It up: Larry Summers' Gilded Path to Money and Power
“So here is the evidence for an American plutocracy of a narrow and discrete but hardly harmless sort.Wall Street seduced the economics profession not through overt corruption, but by aligning the incentives of economists with its own. It was very easy for academic economists to move from universities to central banks to hedge funds — a tightly knit world in which everyone shared the same views about the self-regulating and beneficial effects of open capital markets. The alliance was enormously profitable for everyone: The academics got big consulting fees, and Wall Street got legitimacy. And it has kept the system going despite the enormous policy failures it has generated, not to exclude the recent crisis.”
—Francis Fukuyama, The American Interest, January 2011
Larry Summers’ path to the Obama administration, and his record within it, are symptomatic of a new American plutocracy, and his new job at Harvard will keep the gears of corruption greased.
Summers rose to power under the protective wing of Wall Street and Democratic Party mogul Robert Rubin. He aggressively advanced Rubin’s program of financial deregulation and faithfully rescued his cronies when deregulation went wrong. Despite the economic catastrophes these policies have contributed to, Summers and other Rubinites have continued their political ascendancy in recent years, filling top positions in the Obama administration.
Obama’s economic program, developed almost entirely by Rubin’s proteges, has received widespread popular condemnation for bailing out Wall Street while leaving Main Street out in the cold. Summers has become a defining symbol of the latest sold-out administration within a sold-out system of government. His departure from the White House is more a reflection of this public anger than a personal career choice.
But strategic sensitivity is not change. Summers’ exit does not significantly diminish Rubin’s shadow over the White House, nor does it mark an end or pause in the vicious cycle of today’s crony capitalism. Obama has replaced Summers with a less notorious Rubinite, and the Harvard research center Summers will now direct provides a name-brand intellectual cover for, not an alternative to, the dangerously insular politics his career has thus far embodied.
The Road to Obama is Paved with Rubin
“A relatively senior figure on Wall Street said to me years ago that many of the most important business relationships he had were with the people he met through his other activities. He had found that his business and non-business lives fed each other to the benefit of both.”
—Robert Rubin, Harvard Business School Commencement, 2000
Summers’ arrogant personal style is known to be politically toxic, so he’s been fortunate to have Robert Rubin as a guardian angel easing his way to political stardom. Rubin is what you might call a Wall Street godfather. He joined Goldman Sachs in 1966 and rose to co-CEO and then co-chairman before joining the Clinton administration in 1993 as the first ever director of the National Economic Council, the same position Summers is leaving from now. Summers, a lower level Treasury official at the time, had already endeared himself to Rubin in the 80s, consulting to Goldman Sachs and then working with Rubin on the Dukakis campaign. When Rubin rose to Secretary of the Treasury in 1995, Summers became his deputy.
While running Treasury over the next six years, the two, along with Federal Reserve Chairman Alan Greenspan, were chiefly responsible for the neoliberal economic reforms that allowed banks to market and trade derivatives without oversight or transparency, combine in dangerous ways, take excessive risks, and recover losses when big loans to companies and foreign governments went sour. During the Asian Financial Crisis of 1997-1998, Time Magazine famously labeled the three “The Committee To Save he World”, which is now a running joke because financial deregulation allowed big banks to almost destroy the world ten years later.
When Rubin left Treasury in 1999 to become Chairman of the Executive Committee of Citigroup, he persuaded President Clinton to name Summers as his replacement. Citigroup was a new banking conglomerate made possible by laws Rubin and Summers supported and implemented at Treasury, and it paid Rubin over $100 million in the next ten years.
Another new business model Rubin and Summers made possible was Enron. Rubin had known Enron well through Goldman Sachs’s financing of the company, and recused himself from matters relating to Enron in his first year on the Clinton team. He and Summers went on to craft policies at Treasury that were essential to Enron’s lucrative energy trading business, and they were in touch with Enron executives and lobbyists all the while. Enron meanwhile won $2.4 billion in foreign development deals from Clinton’s Export-Import Bank, then run by Kenneth Brody, a former protege of Rubin’s at Goldman Sachs.
Soon after Rubin joined Citigroup, its investment banking division picked up Enron as a client, and Citigroup went on to become Enron’s largest creditor, loaning almost $1 billion to the company. As revelations of massive accounting fraud and market manipulation emerged over the next years and threatened to bring down the energy company, Rubin and Summers intervened. While Enron’s rigged electricity prices in California were causing unprecedented blackouts, Summers urged Governor Gray Davis to avoid criticizing Enron and recommended further deregulatory measures. Rubin was an official advisor to Gov. Davis on energy market issues at the time, while Citigroup was heavily invested in Enron’s fraudulent California business, and he too likely put pressure on the Governor to lay off Enron. Rubin also pulled strings at Bush’s Treasury Department in late 2001, calling a former employee to see if Treasury could ask the major rating agencies not to downgrade Enron, and Rubin also lobbied the rating agencies directly. (In all likelihood he made similar attempts in behalf of Citigroup during the recent financial crisis.) Their efforts ultimately failed, Enron went bust, thousands of jobs and pensions were destroyed, and its top executives went to jail. It’s hard to believe, but there was some white-collar justice back then.
Over the years Rubin’s connections and financial experience had made him an influential figure at Harvard, his alma mater. He helped oversee Harvard’s endowment before joining Treasury and had been a key fundraising link to big donors on Wall Street and in the Democratic Party. When Clinton’s second term ended in 2001, Rubin lobbied to get Summers the job of Harvard president, and then joined Summers on Harvard’s governing board the next year.
Summers’ presidency at Harvard was plagued with scandals, including some that didn’t come to light until years after he left, including his decision to invest a large part of Harvard’s endowment in risky interest rate swaps that ultimately lost the school more than a billion dollars. While his personal admonishment of professor Cornel West for recording a rap album made headlines, Summers quietly consulted with a hedge fund founded by Rubin proteges Brody (see above) and Frank Brosens, and after being forced out of Harvard in 2006 he began touring Wall Street more frequently, and made $5 million a year working one day per week at hedge fund D.E. Shaw.
Summers also starting showing up around the Hamilton Project, which Rubin had just founded with hedge fund manager Roger Altman. Altman was another Clinton official who had come from Wall Street, following billionaire Peter Peterson from Lehman Brothers to Blackstone Group, and he left Washington to found a major hedge fund in 1996. The Hamilton Project is housed in the Brookings Institution, a prestigious corporate-funded policy discussion center that serves as a sort of staging ground for Democratic elites in transition between government, academic, and business positions. The Hamilton Project would go on to host, more specifically, past and future Democratic Party officials friendly to the financial industry, and to produce a stream of similarly minded policy papers. Then-Senator Obama was the featured political speaker at Hamilton’s inaugural event in April 2006.
Summers joined major banking and political elites on Hamilton’s Advisory Council and appeared at many Hamilton events. During a discussion of the financial crisis in 2008, Summers was asked about his role in repealing Glass-Stegall, the law that forbade commercial and investment banking mergers like Citigroup. “I think it was the right thing to do,” he responded, noting that the repeal of Glass-Stegall made possible a wave of similar mergers during the recent financial crisis, such as Bank of America’s takeover of Merrill Lynch. He was arguing, in effect, that financial deregulation did not cause the financial crisis, it actually solved it. “We need a regulatory system as modern as the markets,” said Summers — quoting Rubin, who was in the room. “We need a hen house as modern as the food chain,” said the fox.
A year after co-founding the Hamilton Project, Rubin was named Co-Chairman of the Council on Foreign Relations (CFR), another policy discussion group as prestigious as Brookings but bipartisan and internationally focused, replacing CFR chair Peter Peterson and cementing Rubin’s dominance in the top echelon of policy elites. Rubin’s son Jamie, became a major Wall Street fundraiser for Obama during these years — Wall Street was Obama’s biggest source of early cash — and although Rubin tepidly endorsed Hillary Clinton in 2007, many of Rubin’s proteges, including Summers, became top advisors to Obama’s presidential campaign and later to his administration. Rubin continued to hold a top position at Citigroup up until the bank almost went bust from its subprime mortgage investments but was saved by a government bailout engineered by the Bush administration and candidates Obama and McCain in September 2008. Michael Froman, a close friend and advisor to Obama who had worked as Rubin’s chief of staff for many years, was also a top executive at Citigroup at the time of the bailout.
Better than the Great Depression
“An awful lot of thoughtful people think … if you project out twenty years … the period that we’re in right now is going to look like the deterioration of the American economy, both in absolute terms and relative to other parts of the world.”
—Robert Rubin, The Politics of Message, 1989
Summers, Froman, and other Rubinites from the Clinton team — including Tim Geithner, Gene Sperling, Jason Furman, Neal Wolin, Jack Lew, and Gary Gensler — reunited in the Obama administration, as countless writers have documented in detail. Other Obama officials from outside Rubin’s network also came from Wall Street. Together, and in collaboration with their contacts in the private sector, they crafted an economic recovery plan that quickly restored financial profits through backdoor bailouts, and eventually corporate profits more generally, but failed to remedy the jobs and housing meltdown:
|Bank profits||128 billion||367 billion*|
|Corporate profits||1.25 trillion||1.66 trillion*|
||21 million||25.7 million|
|Foreclosures since 2009||-||3.4 million|
|* annualized from Q3 2010|
As Obama’s top economic advisor, Summers was responsible for much of it, and he became iconic of a White House that made frequent populist odes to change but rehired all the old Wall Street cronies and operated by Wall Street’s “out of touch” logic from day one. That defenders have been forced to measure Summers’ success against the Great Depression is indicative of his unpopularity as well as the administration’s tone deafness to the deepening economic insecurity of the middle class, much of which is experiencing a depression.
In a bigger sense, the decades-long dance of Rubin and Summers in and out of Washington has become emblematic of a second Gilded Age that wouldn’t even measure well against the first one from a century ago. Much of the public has come to view the Obama Administration as the latest round in a quickening game of musical chairs, played by the same old politicians who owe their fortunes or their careers to the same financial institutions that destroyed the economy, each round further consolidating their unaccountable power, each round bringing fresh disillusionment.
Words like “plutocracy”, “oligarchy”, “kleptocracy”, and even “banana republic” are quickly gaining traction in political discourse. The Fukuyama quote at the top of this article comes from a new issue of The American Interest Magazine devoted to the question, “Are Plutocrats Drowning Our Republic?”, and here’s a small sampling of other recent ones:
“Millions of Americans have awakened to a sobering reality: they live in a plutocracy, where they are disposable.” (Bill Moyers)
“Government has been disabled or captured by the formidable powers of private enterprise and concentrated wealth.” (William Greider)
“America has been busy ‘building a bridge to the 19th century’ — that is, to a new Gilded Age.” (Frank Rich)
“Never before has the United States looked so much like a country of the rich, by the rich, and for the rich.” (Andy Kroll)
“What kind of a country do we aspire to be? Would we really want to be the kind of plutocracy where the richest 1 percent possesses more net worth than the bottom 90 percent? Oops! That’s already us.” (Nicholas Kristof)
Elites still speak seriously about “public service”, but fewer people buy it. As big business feeds more top executives into government positions, floods elections with more money, and gets away with more costly and egregious crimes, it’s easy to see that public interest is being replaced by private profit as the driving force in politics. This process is a vicious cycle, since the effects it produces — concentrated wealth and political power — are also its causes.
Society’s Most Challenging Problems
“The great research universities of America are a tremendous economic resource for the country.”
—Robert Rubin, June 4, 2008
Trillion-dollar back scratching at the intersection of business and government has become one of the most widely recognized and resented problems in modern politics. You might think, then, that a Harvard research center founded to “advance the state of knowledge and policy analysis concerning some of society’s most challenging problems at the interface of the public and private sectors” would place priority on restoring some accountability to American democracy. You might think that Summers’ move to such a center would mark a turn away from the influence of money towards the integrity of critical research and debate.
Think again. Private profit is undermining the legitimacy of academic institutions as well, and recent studies of conflicts of interest and disclosure in the economics profession have demonstrated how pervasive the quiet flow of money in the academy can be. Summers is still highly respected as an academic in the mainstream, even though he has earned millions from speaking and consulting to banks in recent years. That’s partly because Summers, like most economists, doesn’t disclose potential conflicts when he publishes economic articles or opinion pieces. Of course, he has an incentive not to: his Wall Street ties, milked in private, are good for power and money, but threaten his public reputation as an intellectual and public servant. What’s incredible is that many leading economists, who spend their days thinking about the mechanics of incentives and self-interest, don’t even seem to know what a conflict of interest is. Charles Ferguson’s excellent documentary, Inside Job, illustrates this phenomenon in interviews with top economists at Columbia and Harvard who served in the White House and Federal Reserve. Ferguson’s talk with Glenn Hubbard, Bush’s first NEC director and architect of the Bush tax cuts, is particularly revealing:
FERGUSON: Do you think that the economics discipline has, uh, a conflict of interest problem?
HUBBARD: I’m not sure I know what you mean.
FERGUSON: Do you think that a significant fraction of the economics discipline, a number of economists, have financial conflicts of interests that in some way might call into question or color –
HUBBARD: Oh, I see what you’re saying. I doubt it. You know, most academic economists, uh, you know, aren’t wealthy businesspeople.
FERGUSON: I’m looking at your resume now. It looks to me as if the majority of your outside activities are, uh, consulting and directorship arrangements with the financial services industry. Is that, would you not agree with that characterization?
HUBBARD: No, to my knowledge, I don’t think my consulting clients are even on my CV, so –
FERGUSON: Uh, who are your consulting clients?
HUBBARD: I don’t believe I have to discuss that with you.
FERGUSON: Okay. Uh, uh –
HUBBARD: Look, you have a few more minutes, and the interview is over.
FERGUSON: Do they include other financial services firms?
FERGUSON: You don’t remember?
HUBBARD: This isn’t a deposition, sir. I was polite enough to give you time; foolishly, I now see. But you have three more minutes. Give it your best shot.
The faculty at the Mossavar-Rahmani Center for Business and Government (CBG), which Summers will now direct, probably wouldn’t have better answers than Hubbard. The CBG is a part of the Harvard Kennedy School, a graduate school for government policy makers that houses policy research and discussion groups, much like Brookings and CFR. The Center was founded in 1982 and lengthened its name in 2005 when Bijan Mossavar-Rahmani, an oil man, and his wife Sharmin, a Goldman Sachs executive, gifted the Center $15 million.
Corporate cash pays for every program under the CBG. Bijan previously spent almost a decade as a top executive at Apache Corporation. Apache and its founder, Raymond Plank, are major donors to the Center’s Consortium for Energy Policy Research (CEPR) at Harvard, funding its faculty chair, Professor William Hogan. CEPR itself, whose stated goal is “to address the grand challenge of the 21st century: to develop secure, safe, clean, and affordable sources of energy to power world economic growth for present and future generations while protecting the environment from the impacts of global climate change”, is primarily funded by Shell Corporation.
Another program at the Center, the Corporate Social Responsibility Initiative, is sponsored by nefarious corporate abusers like Chevron, Coca-Cola, and Microsoft, as well as Walter Shorenstein, a recently deceased billionaire real estate developer and one of the biggest Democratic donors over the past half-century. The CSRI apparently sees nothing problematic in taking Coca-Cola money and producing polished reports about Coca-Cola’s model social responsibility record in Africa while corporate watchdog Global Exchange has named Coca-Cola as a “most wanted” human rights violator, a leader in “the abuse of worker’s rights, assassinations, water privatization, and worker discrimination.” In Africa, “by regularly denying health insurance to employees and their families, Coca Cola has failed to help stop the spread of AIDS in Africa. The company is one of the continent’s largest private employers, yet only partially covers expensive medicines, while not covering generic medicines at all.” Chevron, another of the CSRI’s original funders, is also on Global Exchange’s most wanted list, “guilty of some of the worst environmental and human rights abuses in the world.”
The Harvard Environmental Economics Program (HEEP) is similar. Primarily funded by Shell and Enel, Italy’s privatized national energy company, as well as the Duke Energy fortune, the program lists a council of advisors full of executives from Duke Energy, ConocoPhillips, Enel, Energy Future Holdings, Lehman Brothers, Morgan Stanley, and Barclays. One advisor, William K Reilly, was EPA administrator under Bush, runs a private equity firm, sits on several energy company boards, and recently co-chaired the BP Oil Commission.
It should come as no surprise at this point that the Health Care Delivery Policy Program’s sponsors included industry giants Aetna, Blue Cross Blue Shield, Merck, and Stryker.
How do these people defend such obvious conflicts of interest? The case of another CBG project, the Harvard Electricity Policy Group (HEPG), is instructive. HEPG is also chaired by CEPR’s Professor Hogan, and is funded by dozens of energy companies with a good deal of common financial interest in electricity policy. Ten years ago HarvardWatch wrote about Harvard’s role in promoting Enron-backed energy deregulation in its report, “Trading Truth”, noting that Enron was a major contributor to HEPG while “much of the research agenda of the HEPG [centered] on deregulation of the electricity market” — the central component of Enron’s fraudulent business model. Hogan authored numerous studies, sometimes in collaboration with a consulting group that received funding from Enron, arguing against market manipulation as a cause of the California Electricity Crisis, and against price caps as a solution, positions that were proven wrong but highly favorable to Enron. We now know from Enron emails that the company was moreover planning to take professor Hogan and others on an “energy deregulation road tour” across the country to persuade other states to adopt the California model.
In response to the HarvardWatch report, Hogan and HEPG’s executive director argued in response that Enron was only one among many funders, that HEPG didn’t take official positions on policy, that many of Hogan’s conclusions about the California electricity market had contradicted Enron’s. All of that is true, and that’s why the Center’s structure works. It’s also why the Brookings Institution and CFR have emerged in recent decades as the government and media’s favorite sources of new political solutions. Corporate-friendly proposals that arise organically from discussions between government and business elites brought together within old institutions funded by a long list of corporate and wealthy individual donors are much more politically viable than those coming directly from a bank lobbyist, an oil company, or a group closely affiliated with one. Corporations don’t dictate specific views, they nurture hundreds of views within a safely constrained spectrum and run with what works best.
The conflicts of interest at CBG are pervasive, but not ubiquitous, so there are always counter-examples for Hogan to cite. Many events and research projects don’t interest the companies funding them, and those that do are not always favorable. Current Senior Fellows include bankers from Goldman Sachs, Morgan Stanley, Lehman Brothers, Wells Fargo, and Salomon Brothers, but there are many others from academia, government, or elsewhere in the private sector. The Center has hosted dozens of events promoting obvious corporate talking points, as well as events with more diverse and critical views.
But how many of CBG’s hundreds of faculty, fellows, or events have ever substantially undermined the interests of the Center’s sponsors, and how many have advanced them? If a CBG program was mostly critical of a sponsor, would it stay funded? If the Center’s sponsors created the same research center with the same faculty and staff outside of an academic institution, would it have the same credibility? Would CBG academics ever push for corporate social responsibility rules that would hurt Coca-Cola’s bottom line?
Harvard, like any university, is always in search of money to add to and expand its programs. Its fundraising offices contantly reach out to wealthy alumni and their companies about possible donations and what they might fund. Harvard faculty, facing cutbacks and job insecurity, need resources and attention to defend and advance their careers, and are attracted to positions backed by a fresh flow of big money. Big business, on the other hand, is constantly looking for the most effective PR its charitable giving can buy and new ways to strengthen its influence over government policy. Meanwhile, currently serving politicians and their staff are especially receptive to policy reforms backed by their corporate friends and donors but credible to the public. Finally, elites entering and exiting government need transitional work, more prestigious education for their resumes, and opportunities to network and test new ideas in a competitive but collegial environment.
These four needs converge in the form of academic policy institutes like the Center for Business and Government. This system works well for Harvard, for its faculty, for corporate donors, and for government elites — so long as the influence of money remains obscured by the open nature of the institution. To the CBG and its architects, “society’s most challenging problems at the interface of the public and private sectors” don’t include corporate capture, which plagues the Center itself. The primary challenge for the CBG in the 21st century is rather to construct a benign intellectual cover for a new era of blatant crony capitalism, keeping the sleazy networks at the center of the corporate-government universe well lubricated but invisible to the public.
Larry Summers has his job cut out for him. He might want to keep his hedge fund work to one day per week.