Galbraith’s Post-Mortem on the Summers Drama

By Dan Kervick

James K. Galbraith presents a summing up of the recent public debate over President Obama’s consideration of Lawrence Summers to replace Ben Bernanke as Fed Chair.  These are the key observations:

Summers drew immediate fire, mostly from liberals. Some were from Harvard, where, as president, he’d alienated many faculty with, among other things, his ill-chosen remarks about women and his handling of a U.S. government lawsuit over dealings between Harvard and Russia. Some foes focused on his time at Treasury under Bill Clinton, when the Glass-Steagall law regulating banks was repealed and the Commodity Futures Modernization Act, which outlawed regulation of derivatives, was passed. Some judged him for his income from Wall Street, including his huge speaking fees and the money he made working for a hedge fund. And his abrasive personality and bruising personal style didn’t make him many liberal friends.

In the field of bank regulation, Summers’ record is awful. But there is another reason why liberals dislike him. Some progressives are drawn to symbolic solutions, to sexy reform proposals that can be written up as bills. Campaigns to bring back the Glass-Steagall Act and the Volcker Rule are recent examples of this. Summers does not play that game.

In his book “The Escape Artists,” Noam Scheiber portrayed Summers as a force for restraint in the 2009 stimulus debates. That too cost him — unfairly — some liberal support. It now seems clear that he was a strong advocate of expansionist policies, though with tactical reservations that muddied the view from outside. On the other hand, there were esoteric matters relating to the bailouts — the Summers-Timothy Geithner toxic-assets plan for the big banks, for example — that might have brought deserved criticism had they been better understood.

The other front-runner, Yellen, doesn’t have Summers’ enemies, but there is little difference in their views on money. One point of divergence seems to be that Summers is more skeptical of the powers of quantitative easing. On that point, in my judgment, he’s right. Quantitative easing helps the banks but does little for the economy.

So the battle was symbolic, a fight of outsiders against insiders, of Wall Street allies against regulators, prosecutors, women and populists.

I can’t agree with Galbraith that the debate was entirely symbolic. Summers’s track record as a friend of Big Finance with a laissez faire attitude toward regulation was serious reason for substantive concern about the dangers of putting him in charge of the nation’s banking system. The efforts of Summers’s supporters to argue that he was now a reformed man and a firm friend of serious regulation were unconvincing. There was little they could point to other than some relatively lame and dispassionate echoings of the new conventional beltway wisdom.

But I do agree with Galbraith that a lot of the debate was symbolic. And that is fine; because in the realm of politics and high-profile appointments, symbols matter a great deal.

Summers is a symbol of the Clinton administration; of the Washington Consensus; of the neoliberal era of free markets and loose rules; of the global and domestic expansion of the US financial system and its perverse over-financialization of our economy; of the “world-saving” neoliberal troika of Greenspan, Rubin and Summers; of the crony capitalist ethos of the revolving door, with its high-paid former and future government stars raking in big bucks from the businesses they treat as “customers” while wearing the regulatory hat; of the relentless and brutal drive toward the reduction of labor power and the growth of inequality. If Obama had selected Summers, that would have signaled to the US and the world that our society was recommitting itself to a regrettable era and its philosophy, instead of moving beyond that era. The signals sent by leaders matter. People take their cues from the top, and the cue Americans and global observers would have taken from a Summers appointment is that the pre-2008 economic order was open for business once again. That would have been a terrible signal to send.

Janet Yellen was also in the Clinton administration, but she has never been as closely associated with those grand neoliberal trends and movements as is Summers. And above all, she hasn’t cashed in the way Summers has.

Is Summers history’s greatest monster? No. But he had his shot on the historical stage. He put his large, assertive stamp on an era of market fundamentalism and deregulation, and helped build a system that collapsed catastrophically in 2007 and 2008, and has left deep, damaging craters in the social landscape forged both before the collapse and in the aftermath. The philosophy of the Summers era has been revealed to be a key contributing cause of the many social and economic problems we now face. That’s why it was time for Summers and the other votaries of the neoliberal god that failed to move aside.

Cross-posted from Rugged Egalitarianism

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15 responses to “Galbraith’s Post-Mortem on the Summers Drama

  1. Bayard Waterbury

    I certainly agree with much of what both you and Jamie have to say about Summers. From my perspective I detect both arrogance and political expediency in him, both qualities which are demonic when applied to a position like FED Chair. Methinks he loves himself far too much to make a good leader to create meaningful concensus, and his economic belief set, well into the realm of neoliberalism as stated, is also dangerous to the economy, since that set of economic ideals has been substantially debunked in practice. As most of us know, our markets are both over and under regulated, or just regulated poorly. But the real fact is that the FED just hasn’t participated appropriately since 2008 in establishing new and better standards. Summers would never appreciate a latter day Pecora, which is what is/was called for, and certainly would never agree to a 2013 version of Glass Steagall. But, mostly I don’t like Larry because I view him as devious, self-serving, and completely untrustworthy.

  2. Very well said. I don’t think Obama gets ANY of this. Hillary probably has the presidency locked up for 2016 assuming she wants it. Is there any chance she will govern freshly and not try to mimic the 1990s with the same old, failed, DC-centric crowd?

    • The ’90s are far enough in the past now that we can come to some fairly accurate conclusions and understanding about what worked and why it all eventually fell apart. One wonders, watching Obama and the Clintonistas today, what they’ve learned.

    • “Very well said. I don’t think Obama gets ANY of this. Hillary probably has the presidency locked up for 2016 assuming she wants it. Is there any chance she will govern freshly and not try to mimic the 1990s with the same old, failed, DC-centric crowd?”

      Not really. Things haven’t changed a great deal for human societies, too much reliance is still placed on patronage and the patron in today’s America is Wall Street.

    • Hillary is certifiably mad. An imperialist lunatic. A war monger. A firm believer in the neoliberal agenda. A very dangerous individual. Finally, if you believe she has the Presidency locked up in 2016, you have an extremely narrow understanding of electoral politics, or the philosophies and ideas the Tea-Repuglicans utilize to influence elections. Sad.

      • Well said, Mr. Fasola, very well stated.

        Schofield is truly delusional to still believe President Obama is clueless — he has consistently followed the directions and directives of Wall Street, only misleading those poor souls who take the political theater of the absurd seriously (possibly the same demographic who claps at the end of a movie, in a public movie theater, which they enjoy???).

        Before (Hillary) Clinton entered the presidential campaign in 2008, she had an audience (and that is the ONLY way to describe it) with Richard Mellon Scaife — during her time in the Senate, she attended those extraordinarily rightwing, religionist prayer group breakfasts in the George W. Bush White House — and during her tenure as chair of the MCC, the funds kept flowing to finance the overthrow of the democratically elected president (Zelaya) of Honduras, all because he was veering towards populism and wished to raise their national minimum wage by a few pennies!

        Whoever and whomever supports or even thinks of a Clinton or an Obama as a “progressive” is truly irrational, for no one can still excuse themselves at this juncture for their ignorance!

        • Sorry, neglected to mention all the appointments of neocons by Hillary when she was appointed to secretary of state (just like Obama’s neocons) — e.g., Marc Grossman, former Geo. W. Bush inner circle guy, Victoria Nuland, whose husband was a founding member of the PNAC group, etc.

    • I think she understands she is too old to run for a president. At the end of her 2nd term she would be close to 80 years old, and the electorate is more tolerant towards ageing male leaders than to female leaders.

  3. I’m happy that the odious Larry Summers will be forced, weeping, to make millions shilling his brilliance in the dreaded private sector.

    However, this post boils down to a claim that Yellen is a part of a change in brand identity for the same neo-liberal regime that has been running the country since the mid-70s.

    So forgive my modified rapture. If anybody wants to get serious, they would ask Yellen if she still supports Chained CPI, or whether she has reconsidered. If she still supports Chained CPI, then her nomination is a key prop in Obama’s Grand Bargain. [Hums: “Love me, love me, I’m a liberal”].

  4. The lives destroyed by Summers’s advocacy were destroyed not symbolically but in earnest.

  5. Good question about Hillary. I’d certainly like to see an alternative.

    Galbraith thinks QE helps banks. How so? The only mechanisms I see are:

    1. Banks sell some bonds to Fed and get a slightly higher price than the market value otherwise.
    2. Non-banks sell some bonds to Fed and deposit proceeds with banks, which then get additional reserves at a lower cost than would otherwise be available.

    These don’t seem all that significant. Am I missing something?

  6. Follow up to request notification of comments by email…

  7. One of the larger – and much more overlooked – pieces of legislation that paved the way for the collapse in 2008 was the 2005 Bankrupcty Reform Act under Bush, sponsored by Senator Leach (fitting name, even if the spelling is a little off). This included a “small” amendment that exempted all derivatives – repos, hypothecation claims, etc. – from the automatic stay when a company (or nation) declares bankruptcy.

    Malone argues that the results of this were demonstrated perfectly in the cases of Bear, Lehman, AIG, and most recently MF global. When the powerful banks and hedge funds of the world lose confidence in a company or nation they can crush it in a matter of minutes, and by the time anyone gets around to the bankrupcty hearings, the assets will have already been claimed by god knows who in the vampire squid community. As the global austerity campaign begins to meet more and more resistance, it seems that the banks will be forced to resort to more extreme measures – bankrupting and looting entire countries.

  8. Perhaps I’ve been reading all the wrong material, and I am always ready to stand corrected, but I believe Larry Summers (and Timothy Geithner) were first appointed by President George H.W. Bush, then after a brief hiatus outside of government service, were reappointed by President Clinton?

    I support Mr. Strether’s comments, of course!

  9. One thing that is puzzling is Galbraith’s pejorative “symbolic solutions” and “sexy reforms that can be written up as bills”. As I read the economic history of the U.S. we had financial instability throughout the 19th century and into the 20th. The “strict supervision” of financial institutions by thee New Deal gave us the longest period of stability in our history. The deregulation of the S&L’s under Reagan was a precursor to the serious return of Laissez Faire under Clinton, Rubin and Summers with GOP support in Congress. Messer’s Clinton, Rubin, and, Summers never, not before or after the crisis. explained why Harding, Coolidge, Hoover, and, Mellon Laissez Faire was superior to the New Deal “strict supervision” of financial institutions. I still don’t understand.