Why The New York Times "Went After" Larry Summers As Fed Chairman

Michael Teague |

Throughout 2013 the financial community has become increasingly fixated on the Federal Reserve, with investor and journalist alike seemingly hanging on to every word that leaves the mouth of Chairman Ben Bernanke, as well as the various regional Fed Presidents.

Now, with the great taper upon us as soon as next month, the scrutiny of all things Fed is likely to reach a fever-pitch, and this state of affairs is currently being exacerbated by the recent debate over who will take Bernanke’s spot as Chairman come next year.

Less than two weeks ago, the question of succession at the central bank was no less a matter of nail-biting anticipation, but for vastly different reasons, as it was assumed by most and sundry that the next individual to lead the Fed would be the current Vice-Chair Janet Yellen. Her potential selection for the job was curiously devoid of the political “controversy” that typically accompanies any decision to appoint anyone to any Federal government post these days, and was welcome for that reason alone.

But there also appeared to be a real consensus about the wisdom of this choice, given Yellen’s academic credentials.  For instance, she had famously predicted both the housing bubble and the financial crisis of 2007, while some of her colleagues such as Alan Greenspan and Bernanke himself were famously broadsided by it.

Then, as if of a sudden, reports emerged that the White House was considering Lawrence Summers for the position, prompting a number of high-profile objections, such as that published by the editorial board of The New York Times. The vehemence of the piece was perhaps overstated, most likely so that other publications could make sensational headlines, such as Politico’s contention that “The NYT goes blazing after Larry Summers.”

Rather, the op-ed’s critique of Mr. Summers was more level-headed than shrill, and relied on the salient aspects of his track-record as well as the tenacity of his high-level supporters, all of whom have President Obama’s ear. In other words, the paper’s contentions were by no means new, and have been a matter of public record for some time.

Thus, while much has been written about Yellen’s prowess in terms of economic forecasting, as well as her educational background, now would also be a good time to review some of Mr. Summers’ resume, starting with the two key points raised by The New York Times: his staunch opposition to the regulation of derivatives trading in the late 1990’s, as well as his position in what for all intents and purposes looks like a cabal of powerful men who have played dominant roles in economic policy since the Clinton years, and who persist despite the fact that many of their actions have had verifiable consequences for the US and global economies.

Those who wish to familiarize themselves in-depth with the controversy surrounding Summers’ successful attempts to sabotage the regulation of derivatives trading during the Clinton Administration, the best place to start would be the Public Broadcasting System’s Frontline documentary called “The Warning.”

The documentary tells the story of Brooksley Born, who in 1994 was appointed to head the Commodities Futures Trading Commission by then-President Bill Clinton. In her capacity as the head of the agency responsible for regulating options and futures, she identified a potential threat in the growing market for swaps, about which little was then known (arguably, little is still known about them despite their role in the financial crisis of 2007). The esoteric nature of these financial instruments had until then put them beyond the oversight of any regulatory body, and Born accordingly sought to correct this potentially dangerous lack of transparency.

But Born’s attempts to reign-in these “complex financial instruments” were thwarted right out of the gate by the likes of Alan Greenspan, Robert Rubin, and none other than Larry Summers. In 1999, with the passage of the Graham-Leach-Bliley act that removed what little remained of the barriers between financial and commercial banking, the CFTC was also barred, by law, from writing regulations for the derivatives markets, and Born resigned from her post.

The New York Times, by no means alone in its opposition to Summers as Fed Chairman, also brings up the point that he and his associates have been operating at the highest levels of fiscal policy for years, and though a great deal of their decisions have not turned out to be in the interests of the American public, much less a great majority of investors, they continue to wield undue influence in policy debates.

In this vein, op-ed identifies a pattern that runs through Summers, Rubin, Greenspan, Timothy Geithner, and Gene Sperling (a current top economic adviser to the president). Specifically, that these men have stood up, more or less successfully, to every significant attempt at regulating the financial industry that has been made since at least Brooksley Born, and have done so both with impunity and to the detriment of the nation’s economy.

Furthermore, the editorial board of The Times points out the uncomfortable parallel that exists between the current effort to oust Janet Yellen from the running, and past situations in which attempts at greater oversight, launched by well-respected women with equally sound credentials such as Sheila Blair and Elizabeth Warren, were similarly thwarted by Summers & Co.

 

[Image: Larry Summers and Timothy Geithner chat in the West Wing Hall in 2003, courtesy of Wikimedia Commons]

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