By Robert E. Prasch*
If we go by the rumors circulating in the financial press, the Obama Administration is on the verge of selecting a proven failure – Lawrence Summers – to be the next Chair of the Federal Reserve System. This is the man, let us recall, whose greatest success in office was to work for the repeal of Glass-Steagall in 1999 and the nudge along the passage of the Commodity Futures Modernization Act of 2000 (which forbade any agency from regulating Credit Default Swaps). These profoundly mistaken decisions provided the nation’s largest and most irresponsible financial institutions with the bulk of the permission they needed to leverage up their balance sheets, hide the risks inherent in the mortgage-backed securities they were pushing onto unsuspecting investors, all while enabling them to become Too Big To Fail (and, as no less than the Attorney General of the United States has affirmed, Too Big To Prosecute).
Few people enjoy criticizing others, but our democracy can only function if office-holders are held accountable (a reality that the NSA is clearly resisting), and the evidence fairly shouts out that Lawrence Summers failed America during his stint as Treasury Secretary. That this failure was not a “one-off mistake” is evident from the fact that he also failed the people of a close ally – South Korea – during their financial crisis. His poor decision-making as President of Harvard University also cost that institution a good deal of money.
Of course, Summers was far from solely responsible for the failure of our financial system in 2007-09. Similarly, he was not solely responsible for the failure of the Obama Administration to even consider disciplining or shrinking the nation’s largest financial institutions. But no one can doubt that Summers played a critical role in the mania for financial deregulation that was characteristic of the Clinton-Gore Administration. Let us recall that today, years after the crash, most American families are poorer as a consequence of his “service to the nation.” By contrast, many bankers are richer. It should be obvious why bankers and their lobbyists wish to see Summers elevated to Chair of the Federal Reserve. It is less obvious why a Democratic President would want to see him at the Fed, or in any other office that even remotely touches on matters of economic policy.
By contrast to Summers, the Federal Reserve needs to be led by someone who understands that Too Big To Fail remains one of our nation’s most significant and unresolved problems. We need someone who understands that the Dodd-Frank Act was a woefully inadequate response to what ails the American financial system. But overall, and of most importance, the Fed must be led by someone who understands that instituting tough and effective regulation and supervision over the nation’s financial institutions is our first line of defense against a repeat of the disaster that just occurred. In short, if Jamie Dimon, Lloyd Blankfein, or Brian Moynihan are not alarmed by the person selected to run the Fed, then we are not doing it right.
Again, by contrast to Summers, or any other alum of the Robert Rubin school of financial deregulation & big bank coddling (which includes Timothy Geithner, Jack Lew, Peter Orszag and Jason Furman), the next Chair of the Federal Reserve needs to be someone who understands that organized irresponsibility, gross misrepresentation, and outright criminality – and I am not using these words casually – have become central to how the our largest financial institutions conduct their businesses today.
The evidence for this misconduct is now ubiquitous. No thanks to the Fed, over the last five years we have witnessed revelation after revelation of wide-ranging and expensive financial scandals from rigging the critically-important LIBOR rate of interest, to massive and ongoing money laundering at HSBC and other banks, the rampant and unchecked issue of fraudulent mortgages and the equally fraudulent securities constructed out of those mortgages, and the systemic and ongoing conduct of financial fraud and perjury conducted by several large banks in the course of dealings with literally thousands of American homeowners. And yet throughout, little was done and nothing was learned.
Bank regulators of even average ability, had they been on the job, would have alerted their superiors and the American public about these goings on long before they evolved into a full-blown crisis. That this did not occur demonstrates a catastrophic failure of leadership, which brings us directly back to the choice for the nation’s premier bank regulator – the Federal Reserve (astute readers may know that the Office of the Comptroller of the Currency is supposed to be the lead regulator of the largest federally-chartered banks, but as it has been so long since they have even tried to do their job we can expect nothing from them but misdirection and obstruction).
Who, then, should run the Fed? Thus far, the conversation has focused on the pros and cons of Quantitative Easing and so forth, but the truth is that monetary policy did not cause the crisis and, sadly, it can do little to hasten its resolution. So, let’s not allow such issues to become a distraction. If, then, we begin our selection process with the assumption that the choice must be someone with national stature and extensive experience in policy-making, whom should we propose or support?
In contrast to the current conversation pitting Fed Vice-Chair Janet Yellen against Lawrence Summers, I would like to suggest that we select an economist who has already shaken up the powers-that-be with his public stance on Too Big To Fail, who understands the need for substantially enhanced capital requirements along with more robust bank regulation and supervision, who has experience as a regulator, who was the long-time President of the Federal Reserve Bank of Kansas City, and who has never been through the revolving door that has spun so lucratively for Robert Rubin and his acolytes. FDIC Vice-Chair Thomas Hoenig is my choice to run the Fed, and I believe that the record clearly indicates that he is far and away the person best positioned to manage the institution while reigning in the Too Big To Fail banks. I know that he is now retired from the Fed and may not want the headaches that would come with the job, so let’s remember to say “please” when we ask him to serve.
*Robert Prasch is Professor of Economics at Middlebury College