Summers’ compensation intensifies reform doubt

April 6, 2009

John Kemp Great DebateThe weekend revelation National Economic Council chief Lawrence Summers received almost $5.2 million in salary and other compensation last year from hedge fund DE Shaw and Co, and hundreds of thousands more in speaking fees from other banks, has dealt another blow to the administration’s fast-waning credibility on financial reform.

Summers and protege Treasury Secretary Timothy Geithner have already attracted criticism for a strategy many commentators believe is unduly favorable to Wall Street.

For all the talk of beefed up supervision and stringent capital requirements in future, financial assistance to the banking system has come with few conditions. Anxious not to offend powerful Wall Street interests, Treasury staff have consistently pushed back against attempts to impose compensation restrictions or other penalties on recipients of public funds.

It all stands in marked contrast to the tough line being taken with General Motors and Chrysler. Bank chiefs were invited to discuss the industry’s future at the White House; GM CEO Richard Wagoner was summarily dismissed.

Wall Street’s special treatment is justified by citing the industry’s pivotal credit-creating role. But there is a widespread suspicion financial interests have captured the government agencies, legislators and senior officials meant to regulate them. It is the type of rent-seeking behavior common in emerging markets and associated in the past with militant industrial unions and President Dwight Eisenhower’s military-industrial complex.

In a thoughtful article in the latest edition of The Atlantic magazine, former IMF chief economist Simon Johnson argues U.S. policy has been controlled for the past two decades by a “financial oligarchy” which exercises influence through campaign contributions and the regular exchange of top personnel between Wall Street firms and the White House, Treasury and other institutions meant to regulate them. It promotes an identity of views between the regulators and the regulated.

The disclosure of Summers’ earnings simply fuels that impression, and the administration’s decision to publish the disclosure forms on a Friday afternoon shows awareness of the embarrassing appearance of business as usual for an administration that came to power promising “change we can believe in.”

No one is accusing Summers or other senior officials of impropriety. His deep involvement with Wall Street was known at the time of his appointment and the fees were all earned before he accepted a position. But with his highly quantitative approach, assumption the solution to most problems is a market-based one, plus instinctive hostility to most forms of regulation, Summers epitomizes the financial revolution that so visibly failed in 2008. He is a leading exponent of the ancien regime. It is hard to imagine he will really press for significant reform in the months and years ahead.

If the president wants more funding from Congress, and to demonstrate he is serious about changing the way Wall Street works, he needs to broaden his circle of advisers.

The president is not short of advice. But he needs to reach out beyond the tight circle of Summers-Geithner-Rubin-Gensler to consider alternative views, then have the courage to trust his reformist instincts rather than the status quo views of the Wall Street-Washington establishment.

50 comments

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One Deng split with the Soviet/Czarist model was to distribute public and private capital and decision making down to the lower levels of factory, county, province. Not a central concentration in Moscow/Beijing/NYWashington. Jefferson would approve, I guess.

Posted by Survivor? | Report as abusive

the thing is, no party wants to go through the hurt of a recession. They all want it to be good times in office. However, you have to let economies go through their natural cycle. Its like you have this old guy that has been running and running and he can’t run anymore, and he’s in the emergency room, but instead of trying to revive him, they are injecting him with more stuff to get him to keep running….the poor guy is going to DIE….the real world allegory of the economy being pumped and pumped with cash, that the deflationary period will turn into an inflationary spiral of HYPERINFLATION and then there won’t be a recession, but a depression that will make 1930 look like a joke….you’ve had 20 years of massive expansion, you need to go through some deflationary period.

This is the current line of thinking, which to some extent I support: save the system, and in doing so, we must bail out banks and other institutions, no matter how brazen otherwise, to preserve the system.

However, there are OTHER ways to save the system than to bailout every single bank and institution. You merge banks for example. You say to AIG, ok, fine, now you HAVE to merge with bank of America, at 10% value of what your worth, stock holders lose all their money. so sorry. O and the CEO’s get fired naturally, because AIG is bankrupt see.

you preserve the system, yet you let people lose their money. you let people go through suffering.

The thing is with reality…friends, is that its self-correcting…logic, is unforgiving. The system will play out like computer logic. It has a way of balancing out. As is seen anywhere on the internet, the velocity of money right now is very low, but there are huge cash reserves. The moment the velocity of money starts to pump away, there’s going to be an explosion. And then, you will lose the value of your money, because assets won’t keep up with inflation (the fed’s version of inflation…the ‘basket’ case, is not actual inflation), you won’t be able to put it anywhere.

Its like they have a bucket ful of money and their just dumping a little bit here, a little bit over there…in a hurried fashion. hey quick more money in the bucket, and then they throw some more over here, some more over there…hoping it will fix something. what does this show? that they don’t know how to fix the problem. I know its a challenging problem, but the solution is not to saturate markets the way they have done. Just know one thing, the people up top, have absolutely no idea what their doing.

Posted by tiberianfallout | Report as abusive

How can anyone trust people like Summers, Geithner Rubin,Gensler, Emmanuel Holder, etc, None of them has CREDIBILITY and there is no way these guys could be impartial about anything they do.

Posted by George | Report as abusive

And how about the real responsible for the economic crisis: Alan Greenspan who miserably failed to regulate Wall Street when he had a chance to do so.

Posted by George | Report as abusive

In today’s America very few creditble advisers are available and to find them out is bit a difficult for new president Obama. But certainly he can do one thing that he should not bring people who already saw their hey days.

Posted by Al Baloushi | Report as abusive

What’s the American taxpayer doing? Don’t just sit there! Do something!!! Wallstreet and Washington are picking your pockets clean!

Demand Paul Volcker be put back in charge to clean this mess up…yet again!

Posted by Peter H. (Canada) | Report as abusive

Enough whining ! Find a list of NEC products and boycott! Let them know why. Call the NEC dealers and sales people

Posted by Paullette | Report as abusive

Where is Ron Paul and many of that ilk when you need them. Never underestimate the ability of a human being to rationalize the truth.. or in this case.fail to have the classic Dutch uncle talk with the American public.

Posted by CLN | Report as abusive

I think a military tank parading down Wall Street with a full round of ammunition may get a message across to some people high up who are hard of hearing – Just Kidding (though finding the thought entertaining)

How about Elliott Ness and the Untouchables? Would they be able to get Al Capone today with all the fuzzy accounting going on?

If Obama doesn’t start kicking serious gluteus maximus in this issue he’ll lose whatever authority and support he’s got in practical terms, which is considerable.

Posted by Dan | Report as abusive

Maizie, you are correct. What the Fed does is a responsibility the U.S. Constitution requires the congress to fulfill. That power was given away in 1913. The Congress is good about giving away their powers; War Powers Act, FISA, Patriot Act, Homeland Security Act….

The fact of the matter is Executive Branch administrations are all beholding to some large corporate interests. This particular administration appears to be in the pocket of Wall Street and High Finance. Summers, Geitner and Emmanuel should all be replaced. They are to closely tied to Wall Street.

A private entity of powerful bankers and bureaucrats controls the money with no government oversight. The definition of a Fascist State is a form of government generally, though not always, headed by a dictator who serves the interests of large industries. I think the U.S. banking system qualifies as a large industry.

Posted by Anubis | Report as abusive