Mr. Sensitive

August 9, 2013

Larry Summers Should Never Be Fed Chairman

Filed under: Uncategorized — lbej @ 10:19

Ben Bernanke is the Chairman of the Board of Governors of the Federal Reserve System, the head of the central bank of the United States, and as such, one of the most powerful people in the world.  (According to Forbes, which publishes an annual list of the world’s most powerful people, Bernanke comes in sixth.  In case you’re curious, the top 3 are Barack Obama, Angela Merkel, and Vladimir Putin.  The full list is here  It’s a fun read.)  Bernanke has been Fed Chairman since 2006 and led the economy through the 2008-2009 financial crisis, avoiding an depression by manipulating financial markets to an unprecedented extent.  The ultimate success or failure of Bernanke’s zero-rate and quantitative easing programs can’t yet be determined, as those programs have yet to be unwound.  Unfortunately (or fortunately), Bernanke won’t be around to orchestrate the end of QE and the return to free and fair financial markets, because his second term ends in 2014 and President Obama has made it clear that he won’t be nominated for a third.  To quote the president, “Well, I think Ben Bernanke’s done an outstanding job. Ben Bernanke’s a little bit like Bob Mueller, the head of the FBI – where he’s already stayed a lot longer than he wanted or he was supposed to.”  Yikes.  Some might say the same thing about you, Barry, but that’s neither here nor there.  The point is that this was an incautious and—in my opinion—inappropriate remark, and Wall Street has been in a tizzy about it since the interview aired in mid-June.  Who will replace Gentle Ben?  Will he or she be more hawkish than Bernanke or more dovish?  Will he or she know how to unwind QE without tanking the stock and bond markets?

First, brief answers to those three questions:

  1.  Probably Janet Yellen, but quite possibly Larry Summers.
  2. The Street thinks Yellen is a dove and Summers is a hawk, at least relatively speaking.
  3. No.

Janet Yellen has extensive experience at the highest levels of monetary policy-making, serving as the President of the Reserve Bank of San Francisco from 2004 to 2010, and as the Vice-Chair of the Federal Reserve System (Bernanke’s deputy) since 2010.  Before she was President of the San Francisco Fed (arguably the second-most important regional reserve bank after the New York Fed), Yellen was Chairwoman of the Council of Economic Advisors under President Clinton, so she has broad economic policy-making experience as well.  Importantly, Yellen is reserved and judicious in her public comments, much like Bernanke himself, and has demonstrated that she understands of the importance of being calm and consistent when speaking on behalf of the central bank of the world’s largest economy.  Most importantly, Yellen was right in the thick of it during the crisis and was part of the decision-making process that led to QE.  If anyone understands how we got here, she does, and her legacy is already tied to the successful unwinding of QE and the restoration of free markets.   Also, she looks like this:


At her most scowly, she looks like a Monetary Merkel


and that’s a reassuring image from a market psychology standpoint.

Larry Summers served as President Clinton’s Secretary of the Treasury from 1999 to 2001 and was Deputy Secretary under Bob Rubin from 1995 to 1999.  He served as Director of the National Economic Council under President Obama from 2009 to 2010.  (What’s the difference between the National Economic Council and the Council of Economic Advisors?  Is there a difference?  Does anyone care?)  Summers has no monetary policy-making experience per se.  From 2001 to 2006, he was President of Harvard University.  He looks like this:


In stark contrast to Yellen’s cautious and prudent public persona, Summers is a buffoon.  Let me say that again so there’s no confusion:  Larry Summers is a buffoon.  He’s also partly responsible for the financial crisis of 2008-2009.  Let’s deal with the buffoonery first.

This is from Wikipedia:

Summers resigned as Harvard’s president in the wake of a no-confidence vote by Harvard faculty that resulted in large part from Summers’s conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end”, and less to patterns of discrimination and socialization.


In addition to that, he cost Harvard piles of money by entering into derivative contracts while president.  Again, from Wikipedia:

During Summers’s presidency at Harvard, the University entered into a series totalling US$3.52 billion of interest rate swaps, financial derivatives that can be used for either hedging or speculation.  Summers approved the decision to enter into the swap contracts as president of the university and as a member of Harvard Corporation, which bears “the school’s ultimate fiduciary responsibility.” By late 2008, those positions had lost approximately $1 billion in value, a setback which forced Harvard to borrow significant sums in distressed market conditions to meet margin calls on the swaps.  In the end Harvard paid $497.6 million in termination fees to investment banks and has agreed to pay another $425 million over 30–40 years.  The decision to enter into the swap positions has been attributed to Summers and has been termed a “massive interest-rate gamble” that ended badly.


All the Wikipedia information is sourced from this article:

Larry seems to have a problem with financial recklessness and/or cluelessness, especially when it comes to derivatives.  From Wikipedia once more:

On July 30, 1998, then-Deputy Secretary of the Treasury Summers testified before the U.S. Congress that “the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.” Summers, like Greenspan and Rubin who also opposed the concept release, offered no proof that the contracts would not be misused by financial institutions. Instead, Summers stated that “to date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need.” In 1999 Summers endorsed the Gramm-Leach-Bliley Act which removed the separation between investment and commercial banks, saying “With this bill, the American financial system takes a major step forward towards the 21st Century.”

On April 18, 2010, in an interview on ABC’s “This Week” program, Clinton said Summers was wrong in the advice he gave him not to regulate derivatives.

To sum up: Larry pushed the policy of banking deregulation that created too-big-to-fail institutions like Citigroup, BofA and AIG (Gramm-Leach-Bliley repealed the 1930s Glass-Steagal Act separating investment banking and deposit-taking); Larry pushed for derivatives—the financial instruments banks used to hide risk prior to 2008’s meltdown—to remain unregulated because the ‘sophisticated financial institutions’ were too cool for school; and Larry is a sexist buffoon.  Oh, and I almost forgot: after he was forced to resign at Harvard he went to ‘work’ at a hedge fund where he was paid $5 million over sixteen months.


Barry seems to like Larry.  I have no idea why that is, but the fact is that Summers’ candidacy has been floated as a trial balloon by the president’s advisors, and it would be easy enough for Larry or Barry to stop the madness if there were no fire behind the smoke.  Who do I think should be the next Fed Chairman?  In reverse order:

3.  Janet Yellen

2.  Not Larry Summers

1.  Ben Bernanke

Why Bernanke?  QE is Ben’s great gamble, and the president should tell him he’s staying on the job until we know for sure if it worked, whether he likes it or not.


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