Larry Summers Is The Wrong Man For The Job

Over the last week we have been hearing that Larry Summers might be President Obama’s pick for the next chair of the Federal Reserve after Ben Bernanke retires.  Just from looking at his history, as well as the economic history of the United States over the last 15 years, he is the wrong man for the job.

President Obama has demonstrated that he is loyal to those that have supported and aided him, but picking Larry Summers would be a terrible mistake, as we are still recovering from the worst financial crisis since the Great Depression.  It is best to put somebody at the Federal Reserve that will respond quickly and effectively.  In looking back to the late 1990’s, it is clear to see that Larry Summers is not that guy.

Back in the late 1990’s, Brooksley Born, the former head of the Commodity Futures Trading Commission (CFTC), vigorously pushed to regulate the risky over-the-counter derivatives market, which are off-balance sheet agreements whose prices are dependent upon or derived from one or more underlying assets like stocks or bonds.   She was bullied and road blocked by Larry Summers, the Deputy Secretary of the Treasury, Robert Rubin, who was the Secretary of the Treasury, and Alan Greenspan, the Chairman of the Federal Reserve; as they told her that by regulating the risky derivatives market, she would cause the greatest financial crisis since the Great Depression.

Alan Greenspan was a strong believer in the libertarian philosophy of Ayn Rand, that free markets should go totally unregulated, which he would incorporate  into his own philosophy.  In a phone call Brooksley Born had with Alan Greenspan, the topic of market fraud had come up, which Greenspan had an unusual take on:  “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”  This is a very simple example of how Alan Greenspan did not favor regulation.  However, my question would be to him, what if the customer doesn’t figure it out?

Larry Summers, who worked very closely with Alan Greenspan during this time, also adopted these philosophical beliefs and strongly opposed regulation.  His position on deregulation was very clear.  In a phone call she had with Larry Summers on the idea of putting out a concept paper, which was a set of questions on whether or not there should be regulation in the derivatives market, he stated": “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.”

During the summer of 1998, Long Term Capital Management – a hedge fund – took a frightful downturn.  In order to prevent it from collapsing it needed to be bailed out, which the Federal Reserve Bank of New York had organized and totaled $3.6 billion.  The reason for this downturn was all centered around what was being traded…risky derivatives, which were left to be unregulated.  This was the first scare of having these risky unregulated derivatives, and the lesson was not learned at that time, as it should have been.

By 1999, Brooksley Born would step down from the CFTC, but Alan Greenspan, Larry Summers, and Robert Rubin were still in Washington D.C. and successfully opposed the regulation the she had fought for.  In looking at the 2008 financial crisis, Alan Greenspan has acknowledged that unregulated business practices, through the use of financial derivatives, had gotten out of control and played a big part in the crisis.

While testifying before Congress in 2008, Alan Greenspan acknowledged the errors in his economic philosophy.  He stated: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders, and their equity in the firms…”.  Basically, he is saying that leaving these markets totally unregulated was wrong.

Larry Summers, although history has now proven his actions and economic beliefs to be completely wrong, has never acknowledged and owned up to his errors.  The policies he supported played a big role in the greatest financial crisis since the Great Depression.  In 2006, the Faculty of Arts and Sciences at Harvard University forced him to resign as the university president due to a vote of no confidence.  This is neither the man nor the character needed as chairman of the Federal Reserve.