The ups and downs of Summers
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Larry Summers has withdrawn his name from consideration for the position of Federal Reserve chairman, the WSJ reported Sunday, citing an “acrimonious” confirmation battle.
For Summers, this is just the latest downturn in his colorful, highly public career as an economist with ambitions to power. Here are the ups and downs of the Summers story before his tenure in the Obama administration:
Summers is an undoubtedly brilliant scholar. He got his start teaching at Harvard, and received tenure in 1983 at the age of 28 — the same year (and age) as Jeff Sachs. He served on the staff of the Council of Economic Advisers from 1982-83 during the Reagan White House. He was an economic advisor to the failed Dukakis presidential campaign in 1988. In 1991, he left Harvard to become the chief economist at the World Bank. While his official bio indicates “his research featured an influential report demonstrating the very high return on investing in educating girls in developing countries”, he is also well known for what was meant to be an “ironic aside” in a leaked memo he signed suggesting the World Bank encourage more migration of “dirty” (pollution-heavy) industries to poor countries.
In 1993, Summers became the undersecretary of international affairs. In 1995, he was promoted to deputy secretary of the Treasury under Robert Rubin. He succeeded Rubin in 1999. It was during this period that Summers became an aggressive proponent of deregulation. The CTFC warned in the late ‘90s of the potential for economic meltdown, but Summers would have none of it. In his excellent National Journal profile of Summers’ career, Michael Hirsh writes, “when Brooksley Born, then the chairwoman of the Commodity Futures Trading Commission, devised a 1998 proposal suggesting that over-the-counter derivatives be regulated, he called her, livid”.
The next year, Summers, along with Alan Greenspan and Rubin, then backed the repeal of the Glass-Steagall Act. The 1999 passage of the Gramm–Leach–Bliley Act, tearing down the wall between commercial and investment banks. In 2000, the Summers-backed Commodity Futures Modernization Act passed, basically preventing the regulation of derivatives trading — a major catalyst to the 2008 financial crisis. “In hindsight, the CFMA turned out to be one of the most momentous pieces of legislation passed during the entire Clinton administration,” writes Newsweek.
This is not to say there were not bright spots to his tenure during the Clinton Administration. Summers was key in negotiating the $20 billion bailout of Mexico in 1995. He “was the first to recognize the possible ripple effects of the crisis in emerging markets and who organized much of the loan effort”, according to the NYTimes. And the same three who pushed for deregulation in American markets — Summers, Rubin, and Greenspan — were the same group that Time Magazine called the “Committee to Save the World” during the emerging markets crisis of the late 90s. “The three men have so far protected American growth, making investors deliriously, perhaps delusionally, happy in the process,” Time wrote.
President of Harvard
After leaving the government, Summers served as President of Harvard from 2001-2006. Particularly notable were his remarks about the head of the African American studies department, Cornel West, and his assertion, at a National Bureau of Economic Research conference, that one of the reasons for the dearth of women in the sciences had to do with “intrinsic aptitude”. Summers was also aggressive with Harvard’s cash and endowment during his presidency. “The result was that the university ended up losing 27% of its $6 billion in “cash”: a whopping $1.8 billion”, writes Felix. In addition, in 2008, Harvard got hit with a $1 billion loss on interest rate swaps that were put in place during Summers’ presidency.
A series of missteps led to his being forced out of office after five years by Harvard’s governing corporation. None was more costly than his handling of Harvard’s Russia scandal, in which Summers’s close friend and collaborator Andre Shleifer was found to have attempted to muscle into the mutual fund business for himself while advising his Russian enablers on behalf of the US State Department.
The closer you look at Summers’s not-so-tacit approval of the affair, the more appalling it becomes. That fact that no one in economics has mounted a defense of Shleifer’s and Summers’s conduct – not Andrei, not Larry, not any of their numerous seconds – should tell you all you need to know: their actions were indefensible.
Summers has also gone on to make a lot of money in the private sector. He worked one day a week for the hedge fund DE Shaw; he has also made millions of dollars in speeches, joined various Silicon Valley boards, and consulted for clients including Citigroup, Andreessen Horowitz, and Nasdaq OMX. As a consequence, his net worth jumped from about $1 million in 2001 to somewhere between $17 million and $39 million in 2009. When President Obama was elected, he reentered the government, serving as the director of the National Economic Council, and, in that role, as Obama’s closest economic adviser. – Shane Ferro and Felix Salmon
On to today’s links: