One of the great Inside the Beltway debates this August is about who should replace Ben Bernanke who is retiring as the Chairman of the Federal Reserve.
So who cares?
Well, you probably should.
Much of the talk is about Larry Summers, former Secretary of the Treasury, former Obama economics advisor, former President of Harvard
University, and current Wall Street investor.
There also is a qualified, well respected woman candidate for the Fed job, Janet Yellen, the current Fed Vice-Chair.
While most of the rest of the world provided a purely rightist ideological response to the Great Recession, the U.S. resisted the push for total austerity and we did a stimulus plan. Then, when it was clear that more stimulus was needed, the Congress blocked it.
In comes Bernanke to the rescue. The Fed pumped the economy and kept us afloat while Europeans headed for the tank.
So the Fed can be an important economic safeguard when the rest of the government is frozen like a deer in the headlights. Important stuff.
But perhaps even more important is that the Fed is a major player in the regulation of banks and Wall Street.
My view is that progressive advocate should focus their attention on this aspect of the Fed’s
work as we consider the merits of the various nominees.
Larry Summers was defended the other day by President Obama as the bloggers and
Washington talking heads began blogging and talking about the Fed on a slow news day.
Women’s groups have been particularly concerned about Summers because he once suggested that innate differences between the sexes prevented women from successful careers in math and science.
Summers also has detractors whose views are based on temperament. This view suggests that Summers thinks he is the smartest guy in the room no matter what room he is in and that he has a tendency to shoot from the lip. These detractors point to the need for the Fed to operate based on science and the need for a Chair who is careful about what is said in public.
Both of these matters have their importance, but I am even more worried about his views on the regulation of Wall Street and the banks.
- Summers championed deregulatory excesses that contributed directly to the financial collapse in 2008.
- He supported the repeal of Glass-Steagall limits on investment banks.
- He aggressively obstructed the efforts of Brooksley Born to regulate the over-the counter derivatives market when she was head of the Commodity Futures Trading Commission (CFTC).
- His unfounded and sexist beliefs that women can’t learn math and science as well as men, or that men are more committed to their careers than married women, makes him a clearly unsuitable choice for this position.
- Furthermore, Mr. Summers personifies the revolving door culture that has so discredited Washington in the minds of the American people.
The serious regulatory lapses that led to the Great Recession include the repeal of Depression Era laws that deliberately separated banking from speculative investment. These safeguards were repealed in 1999 in an Act known as Gramm, Leach, Bliley – a bill signed by President Clinton when Summers was Treasury Secretary. Summers endorsed and praised the Act. Summers also supported deregulation of the
derivatives market. The regulatory environment that led to the economic disaster largely was endorsed by Summers.
Perhaps even more revealing are some of Summers investment decisions. While serving as President of Harvard University Summers approved the University investing in some fancy financial instruments called interest rate swaps that have contributed to the financial mess. Harvard
University lost $1 Billion.
This points to a willingness of Summers to believe in this Orwellian world of unfettered investment.
But the most troubling is a start-up company that Summers is helping to found. ‘Peer to Peer Lending,’ one of Summers’ companies, is an on line service that permits prospective lenders to tell their story to prospective borrowers. It is headquartered in Utah so that it can charge high interest rates.
Consumer groups point out that there is little background checking done to determine whether borrowers can pay back the money invested. This is exactly the sort of behavior that got us into the mortgage mess and we do not need it at the Fed.