Larry Summers is confirming rumors that he plans on leaving his job as the President's chief economic adviser at the end of the year. While some may consider this a panicky attempt to hightail it out the door before he is blamed for significant Democratic losses this election cycle, I see it in a more positive light. Just think of the reception he will receive when he returns to Wall Street!
On Wall Street, Summers will be greeted like a conquering hero. Never have so many financiers been made so rich because of the actions of one man. Plus, he can go back to that genius Wall Street salary. When he worked for one world's largest hedge funds, D.E. Shaw, he worked one day a week and earned $5.2 million before being picked by Obama to head the National Economic Council. Ka-ching! There will be plenty of time for him to teach a class Harvard (although you can be sure they won't let him anywhere near that endowment again.)
A Resume Only Wall Street Could Love
Summers has a long resume that makes him an ideal candidate for a job on the Street. For years, he promoted the concept of "a post-industrial age" where manufacturing takes a back seat. An expression he was fond of repeating was, "Financial markets do not just oil the wheels of economic growth. They are the wheels." And has he worked very hard his entire career to grease those wheels.
Between 1992 and 2001, Summers held various positions in the U.S. Treasury Department, including that of Treasury Secretary from 1999 to 2001. Summers has described the 1990's as a time when "important steps" were taken to achieve "deregulation in key sectors of the economy" such as financial services. He has also said that during this period, government officials and private financial interests collaborated in a spirit of cooperation "to provide the right framework for our financial industry to thrive."
Role in the Elimination of Glass-Steagall:
Along with Robert Rubin and Alan Greenspan, Summers brought about elimination of key U.S. financial regulations, including the Glass-Steagall Act. Summers argued for elimination of the Glass-Steagall Act by saying it imposed "archaic financial restrictions." "Our leadership of the world's financial markets would be enhanced. And consumers would see the benefits in the form of greater innovation and lower prices." That "innovation" led directly to the formation of "too big to fail firms" that were allowed to gamble in the securities market like never before, and which were a key contributor to the collapse of the global economy.
Role in Killing Derivatives Reform:
Summers was particularly aggressive in his efforts to block regulations of derivatives, regulations that might have prevented the 2008 economic meltdown. While he was at the Treasury Department, his enthusiasm for financial deregulation conflicted with the views of Brooksley Born, Chair of the Commodities Futures Trading Commission (CTFC). Born had extensive experience working as a lawyer in the derivatives area, and was concerned about the lack of transparency in this multi-trillion dollar financial market. Summers collaborated with Alan Greenspan, Robert Rubin, and Arthur Levitt to block Born's efforts to regulate this burgeoning market.
According to New York Times reporter Timothy O'Brien, "They were all part of a very concerted effort to shut her up and to shut her down. And they did, in fact, shut her up and shut her down. Bob Rubin is not a guy who likes confrontation. He's confrontation-averse. But he understands that you need someone in there who can swing a heavy axe, and that person was Larry Summers. He was the enforcer."
Former CFTC attorney Michael Greenberger has recounted how Summers called Born personally to accuse her of risking a major financial crisis with her proposal to bring transparency to the derivatives market. Summers echoed the concerns of the "13 Bankers" who were in his office at the time he made the call to Born, a conversation that gave birth to the title of Simon Johnson's great book, 13 Bankers, about the history of the financial crisis. Then and now derivatives trading remains the source of those outsized Wall Street bonuses the American people cannot stand.
Role in the Enron Crisis:
When he was about to take office as Treasury Secretary, Summers received a congratulatory letter from Ken Lay, the President of Enron Corporation. The letter was addressed "Dear Larry." In his response addressed to "Ken," Summers promised, "I'll keep my eye on power deregulation and energy-market infrastructure issues." And he did.
During California's energy crisis in 2000, Summers rejected the idea that energy companies like Enron were manipulating the market and gouging consumers. He opposed Governor Gray Davis' plan for government intervention with price controls, claiming "This is classic supply and demand. The only way to fix this is ultimately by allowing retail prices to go wherever they have to go."
Role in Harvard's Financial Losses:
Summers became President of Harvard University in 2001 and resigned under a cloud in 2006, leaving behind a ticking time bomb of interest rate swaps that he helped negotiate in 2004. According to Bloomberg, "the swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them."
Role in the Bailout and Stimulus:
Summers had a key role in determining the size of the federal bailout of the financial services industry ($4.7 trillion) and of the economic stimulus package the Obama administration submitted to Congress ($787 billion). The stimulus package was much smaller than what was being recommended by many economists, and as a result, the U.S. has been stuck at near double digit unemployment for almost two years. Last year, economist Paul Krugman warned that while cutting the size of the stimulus might get more Republican votes, it would fail to significantly reduce unemployment. This failure would then be blamed on the Democrats and be used to argue that government spending does not work. Krugman's prediction has held true.
Today, Wall Street is bouncing back with healthy profit margins and even healthier bonuses, while Main Street is still mired in the Great Recession. Because Obama is seen as doing too little for the middle class, Democrats are likely to suffer steep losses this November.
The sooner Obama replaces Summers with a competent economist, the better. There's a high-speed Acela train leaving for Wall Street at 2:00 p.m. today, perhaps Vice President Biden will be kind enough to show Mr. Summers the way?
This article was based on the original research by the Center for Media and Democracy in our SourceWatch wiki.