By Dan Kervick
The 2008 financial crisis has been oozing slowly down the DC memory hole for some time now, as a series of destructive and economy-crushing budget battles has taken center stage in Washington. But the debate over outgoing Fed Chief Ben Bernanke’s successor has reignited a lot of the pain and outrage that the 2008 debacle caused. That debate, and the President’s obtuse support for Larry Summers, is also casting a very harsh light on the White House’s basic competence, its seemingly dim grasp of the causes of the financial collapse, and its blasé and corrupt attitudes toward the correct response to it.
Ezra Klein asks what is now increasingly seen as the central question about the decision on Ben Bernanke’s replacement for Fed Chief: “Do you trust Larry Summers or Janet Yellen to police Wall Street?” And Klein accurately reports what I imagine is the consensus opinion among people with a serious concern about financial regulation and reform when it comes to Lawrence Summers:
This is why the prospect of a Summers chairmanship gives financial reformers heartburn. They think he can’t be trusted to regulate Wall Street.
But this murmuring among the zealots doesn’t impress complacent White House insiders, like Michael Barr, who thinks Summers doesn’t get enough credit:
“I wouldn’t have gone to work for Larry if he didn’t believe in financial regulation,” Barr said. “He cares about this stuff. I know he’d implement Dodd-Frank. And I think his impatience, which some people don’t like, would serve us well in this implementation phase.”
Barr attempts to turn the now infamous Summers impatience into a plus, perhaps picking up on the new meme of Summers’s “gravitas”, a seemingly imponderable and occult quality of masculine charisma and decisiveness that Summers is reputed to possess in abundance.
The distinction that Summers’s allies draw is that he favors blunt, simple regulation — such as higher, simpler capital ratios – over more intricate regulatory interventions, which he thinks routinely enable Wall Street lawyers to outmaneuver government regulators. This makes him, they believe, a tougher regulator than many of his critics, who they view as getting distracted by ideas that punish the banks rather than secure the financial system.
Well, OK. But the Fed has already implemented those tougher capital rules under the leadership of Bernanke and Vice Chair Janet Yellen, who came out strongly for them back in January. So what else would Summers do?
Klein then offhandedly says:
The criticism of Yellen is that — like Bernanke and Alan Greenspan before her — regulating banks simply isn’t something she’s terribly interested in.
Now that’s funny. Because in addition to the WSJ piece on capital rules to which I just linked, a cursory web search brings up several major Yellen speeches and writings on Financial Reform:
A Minsky Meltdown: Lessons for Central Bankers
Linkages between Monetary and Regulatory Policy: Lessons from the Crisis
Pursuing Financial Stability at the Federal Reserve
Macroprudential Supervision and Monetary Policy in the Post-crisis World
Yellen appears to have thought about financial regulation quite a bit indeed, including showing an appreciation for Hyman Minsky’s financial instability hypothesis. And unlike Summers, she has actually been working on this stuff for several years now, because it’s … you know … her job. The fact that Yellen has 20 years of experience at the Fed as both a president and a governor seems unimpressive to Summers’s fans, who are more turned on by the je ne sais quoi of Larry’s charismatically glowing brain power. Whatever Summers has, it seems to produce that strange “smartest guy in the room” syndrome among fawning observers. (Weren’t Ken Lay and the Enron guys also the smartest guys in the room?)
But we are also told that Larry the Gravitating has the trust of “the markets.” Now who are these guys from “the markets” who have bestowed this vaunted trust? Are those the same 13 guys who were in the room when Summers shot down Brooksley Born? [Warning to reader: Brooksley Born is a gravitas-deprived female whose competent professionalism some Summers fans may find disturbing. View clip with caution.]
Or are they the guys who nodded in vigorous approval when Summers mocked Raghuram Rajan as a Luddite for daring to challenge the Wall Street bonus culture?
The new White House effort to turn Summers into the candidate who is stronger on regulation is an impressively Republican turn of strategy. Republicans are long known for taking a candidate’s signal weakness and turning it into a virtue through the rhetorical power of sheer chutzpah and denial of the obvious.
The Democratic Party is on the verge of defining itself as congenitally untrustworthy and systemically dangerous when it comes to the financial sector. They seem to have spliced the criminogenic culture of Wall Street deeply into their DNA. They have made a point of refusing to enforce the law of the land against the financial plutonomy on the grounds that the big bank poobahs are “too big to prosecute”. And now the same guys who should be in political Siberia for creating the economic conditions that allowed an unleashed, predatory and bloated financial economy to go critical and implode in 2008 are right back in the mix again, angling for one of Bill Clinton’s famous second chances.
(Or maybe it’s a third chance, given that Summers is also responsible for putting the kibosh on a Christina’ s Romer’s recommendation for a bigger stimulus package. Alas, Romer is another little lady bereft of the aforementioned gravitas that, as we all know, is carried by the Y chromosome.)
Now the catastrophe of 2008 was by no means a partisan affair, but rather a bipartisan effort applied over three decades of neoliberal enthusiasm for deregulation and market fundamentalism. The Democratic contingent among this trend was known sometimes as the Third Way, and was represented by organizations like the Democratic Leadership Council. Summers, Robert Rubin and the Clintons were among its leading lights. The economic world they helped engineer – along with their Republican ally Alan Greenspan – failed and crashed in 2008.
You sometimes hear some funny partisan theories from these old school Democrats about the financial crisis. Their line is that the economy was just awesome until the Republicans “put two wars on a credit card.” Do they really believe the conservative theory that public debt and spending collapsed the economy – perhaps via “crowding out”? Do they really not get the role of the deep structural flaws, socioeconomic imbalances, rampant greed, tolerance of exploitation and theft, and predatory financial cancers that define the world they themselves helped build in the 90’s, a tottering and doomed system that was already in place before the wars came along? No wonder Obama has wasted three years helping the Republicans strangle the economy with grand bargains, fiscal cliffs and sequestrations! They’ve got an ostrich view of history, and a ridiculous view on the underlying causes of the 2008 crisis.
Right now, it looks like most prominent Democrats in the established punditry and elite opinion and policy class have zero interest in transforming the real economy by introducing major structural reform, and just want to get back to business as usual. Obama famously promised to stand between the bankers and the people with the pitchforks. Like Warren Harding, who also presided over rampant corruption, Obama and the old guard Democrats just want a “return to normalcy.” They have no economic ideas left beyond more corporate tax incentives, bubbles, financial fluff, and rich meals of vampire squid sashimi for their lower Manhattan cronies.
It’s hard for me to believe that Democratic office seekers are eager to go into 2014 with this kind of stiff-necked backwardness and stubborn anti-populism defining their party. They need to tell the White House to get a clue. The neoliberal era needs to be over … yesterday. It failed. It crashed and burned. Somehow Democrats need to find a way to cut the cord with the Third Way for good, empower a new and less corrupt generation of leaders, and begin to develop the Next Way, an agenda for substantive equality, vibrant participatory democracy, financial sanity and reform, vigorous enforcement of the rule of law and full employment.
Dan, I love this article. Summers is a WallStreeter “have” who is an elitist and a supporter of the Friedman Neoliberal idiocy which has so corrupted the world’s political economic culture for the past quarter century plus. However, where we part company regarding politics, is that you seem to somehow believe that the differential in governance somehow relates to the classic Republican conservatism and the classic Democratic progressivism. I completely disagree. This is historical, but not current. Up until Reagan, such identifiers generally held truth, however, since the Friedmaniacs got their teeth into the political economy with the infamous (now) “trickledown/deregulate” idealism of the Friedman/Hayek Chicago School of economic theory, the subscription of the 1% to supporting its dictates has infiltrated the Democratic Party to a faretheewell. Realize that Clinton, with the Greenspan, Summers, Rubin team trashed every last iota of financial market ethics and responsibility, in favor of the Wall Street culture of greed without bounds. Look at our current President who moved into 1600 PA Ave with a new economic team of Summers, Geithner, et al (Romer was a throwaway to Progressives) and left Bernanke (a Greenspan toady) at the FED. His true colors were clear as a bell, and every last iota of my enthusiasm for our first black chief executive being and agent of change vanished overnight. It was clearly a “same old, same old” event. But then, Mr. Obama, being a Harvardite and law professor indicated, even from the start, that elitist blood had been transfused into his core, and he was not the answer America needed for real, responsible governance. Now, we can’t be surprised that he is so supportive of (former Goldman Sachs man) Summers. After all, Barack has Jamie on his “speed dial” list. What more is their to say. Now, swimming upstream against the current of lobbying created by the TBTF’s and their fellow 1%ers is a fools mission. I think Yellen will win the seat at the head of the FED when push comes to shove, but I won’t be surprised if Summers ends up there. Maybe it’s just me, but Larry scares the crap out of me.
I obviously agree with your cogent observation re the no-hope Dems.
But I’d like to clarify that “monetarily-speaking”, Friedman was not of the later Hayek/Chicago School, but of the much earlier Simons/Douglas/Knight progressive Chicago School of money-thinking, and he never wavered from this state-run money posit.
Those progressive UofChicago economists co-authored the 1933 Chicago Plan for Monetary Reform memoranda to FDR, and Friedman supported the essence of the CP with his sovereign fiat money BY RULE positions and proposals thereafter.
This paper by Levy Economics Institute author Dr. Ronnie Phillips has a very clear explanation of the role played by the early Chicago School economists in advancing reform to the money system.
Notably therein, Phillips makes the following observation, which reinforces the progressive nature of the Chicago School in the early part of the 20th century.
“”Robert M. Hutchins, the President of the University of Chicago, mailed a copy of the November Chicago plan to Senator Bronson Cutting of New Mexico in December 1933.
Cutting was a progressive Republican in the mode of Robert LaFollette, Sr. He was highly critical of the role of private bankers in the economy and an advocate of greater government involvement in banking and credit and national planning.””
Sorry that the takeaway must be that Friedman, as student of Simons and advocate of his monetary reform proposals, was far to the progressive left on monetary matters than anyone I have seen advancing theories of modern money on these pages.
Terrific thoughts here, Dan. Why Obama is considering a lightning rod like Summers is beyond me. It just doesn’t compute. If he appoints him, then it will almost certainly seal his legacy as one of the most, if not the most, disappointing so called progressives in my lifetime.
Sorry, friend, if you believe barack o. was ever a progressive, then you made absolutely no effort to vet the candidate b.o. before pulling the lever. There was no due diligence on your part. So like the majority who were fooled by pritzger’s pinocchio and you deserve what you got and are now getting. The vast majority of politically and economically ignorant amerikans are too lazy to do anything more than what you are told to do by the mass media propaganda machine. How does being a chump feel? Ignorance is bliss is it not? Wake up serf!
I dont see who is governer as the biggest issue but the actual structure of the current monetary system. I think that should be the debate in the mainstream media.
I think little green men from Mars are coming to get us all, too. C’mon, awake from your coma. Do you actually believe the main stream, controlled by the 0.1%, wants to educate the mostly economically ignorant citizens of the amerikan stasi state? Your smokin’ the real good stuff if you do.
There should be.
Charlie’s ‘smokin the good stuff’ observe has to to with what has the highest likelihood of happening.
But things do change.
And, once turned, the herd advances in unison.
So, keep plugging for what ‘should’ happen.
Agree with everything said about both Summers and Yellin as far as it goes in what I still see as a dreadful choice.
However, to your point that : “The Democratic Party is on the verge of defining itself as congenitally untrustworthy and systemically dangerous when it comes to the financial sector.”
Come on, Dan, REALLY?
On the verge?
The real problem with this big picture stuff is the political-economic reality that both Summers and Yellin only surface as the choice based on their having the “trust of the markets”. Meanwhile, it is those invisible marketeers of capital that the American people trust the least at this point in time. It’s kind of like a fractured fairy tale.
The people don’t trust the marketeers, but the marketeers need to trust whoever
Then, there’s the ‘somehow’ that precedes the notion that it is the big (D)emocrats who need to find a ‘next’ way to carry on the popularization of alternative monetary memes.
Unfortunately, as a PARTY, big-Democrats are way past being on the verge of being in the corrupting employ of the same financialistas as the rest of the Wall Street establishment.
Dan, only those who support (little-d)emocracy in our economic endeavors, and essentially our monetary constructs, that must ‘somehow’ advance The Next Way, with the hope that both progressive and conservative leaders will follow. Real advancement can only happen through a non-partisan awakening.
Apologies. Bad paste.
“The people don’t trust the marketeers, but those marketeers need to trust whoever gets selected to head the nation’s central bank that, ostensibly, belongs to those same people.”
“The Democratic Party is on the verge of defining itself as congenitally untrustworthy and systemically dangerous when it comes to the financial sector. They seem to have spliced the criminogenic culture of Wall Street deeply into their DNA. They have made a point of refusing to enforce the law of the land against the financial plutonomy on the grounds that the big bank poobahs are “too big to prosecute”.” (Kervick)
Maybe there is something else going on w/the entire political apparatus of the entire world? Like G-SIFIs?
“This isn’t about lack of proof or the complexities of financial crimes or showing who knew or proving actual intent. It is not about proof or criminality at all. It is about there being a new category of financial entity which our law makers and prosecutors have decided for us, is above the law. They are called G-SIFIs, Globally, Systemically Important Financial Institutions or G-SIBs, Globally Systemically Important Banks.
I think we have not yet thought through the immense consequences of the decision that has been made for us, that G-SIFIs are above the law. But I think we need to make a start.
We all know the HSBC isn’t the only bank too large to prosecute. There is in fact a list.
The list is decided upon by the FSB. It is updated every year.
The FBS (Financial Stability Board) is a new international body. It is made of representatives from the central bank, financial regulator and Treasury from each of the 25 member nations plus representatives from:
The Bank for International Settlements (BIS), the ECB, the European Commission, the IMF, OECD and World Bank, plus representatives from the Basel Committee on Banking Supervision (part of the BIS), the Committee on the Global Financial System (another part of the BIS), the Committee on Payment and Settlement Systems (another part of the BIS), the International Association of Insurance Supervisors, the International Accounting Standards Board, and the International Organization of Securities Commissions.
Guess which institutions provide the membership for ALL of the above international bodies? Yes, you got it – the big banks. And how many Central banks can you think of that are staffed or even headed by people formerly from one of the Big Banks?
You tell me who is really staffs the FSB and whose world view and interests the FSB actually represents?
Then consider, they are the ones who decided who is above the law.
28 banks are officially above the law and WILL NOT be criminally prosecuted no matter what they do. Remember that’s not me saying this. It is the U.S. Department of Justice saying it.
Not only 28 banks but all their senior executives, chairman/woman and board members. It would be very difficult to find a senior person in a bank to be criminally guilty but yet not find the institution guilty. So we could compile a list of people who are now, at least as concerns any financial and professional actions, also above the law. They can do things you would go to goal for. How does that feel?
Oh, by the way, this year, in April, we will see the announcement of another list, this time of Globally Systemically Important Insurers (G-SIIs). They too will be above the Law.” http://www.golemxiv.co.uk/2013/03/twilight-of-justice/