The Summers or Geithner nightmare: James Saft

July 18, 2013

By James Saft

(Reuters) – If you got me at gun-point, backed me up to the edge of a high cliff and forced me to choose between Larry Summers and Tim Geithner as the next Federal Reserve Chairman, I think I might jump.

And yet, the two former Treasury secretaries are the third and fourth favorites in the running for the job, according to Irish bookmakers Paddypower. (here)

Summers, at odds of 5.5 to 1, and Geithner, at 14 to 1, are still relative outsiders, with Federal Reserve Vice Chairman Janet Yellen the 1 to 4 favorite to take over if, as expected, Ben Bernanke steps down at the expiration of his term in January.

I can think of no-one, with the possible exceptions of Robert Rubin and Alan Greenspan, who are more closely identified than Summers and Geithner with the errors of financial leadership of the past 15 years. And should either get the top job it would send a clear signal that efforts to properly regulate finance will come to very little, and that the chances of yet another in the long succession of crises are getting larger.

First Summers, who has a history of working to water down or make ineffective financial regulation dating back at least to his opposition to derivatives regulation and support for the dismantling of Glass-Steagall in the late 1990s.

Look at how he hailed, in 1999, the Graham-Leach-Bliley Act, which helped to create the too-big-to-fail world we all enjoy.

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Summers said.

Quite right, but a pity that the 21st century has worked out so poorly for so many of us.

Summers also, while President of Harvard, presided over a little flutter on interest rates which ended up costing the institution more than $900 million, exactly the kind of ill-conceived but fee-generating trade financial intermediaries just love.

Finally, Summers does a very good impression of a man who isn’t good at learning from his own mistakes or from criticism.

Dean Baker, of the Center for Economic and Policy Research paints a very telling picture of how he roasted critics who pointed out the risks of a bonus culture in banking, and almost unbelievably did so at a love-in held to honor Alan Greenspan. (www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/the-return-of-larry-summers)

HOW MANY BLACK SWANS IN A ROW?

Geithner too has a record of being too easy on banks, first when he ran the New York Federal Reserve and later as Treasury Secretary. Under his watch at the NY Fed, which bore prime responsibility for money center bank regulation, Citigroup built itself into the time-bomb which eventually went off. A requirement for quarterly risk reports put in place before he took office in 2003 was lifted while he was in charge as was a ban on major acquisitions.

While Treasury Secretary he worked assiduously to “foam the runways” for the largest troubled banks, notably failing to hold AIG counterparties accountable for their own poor decisions.

Worse yet, Geithner preached the gospel of “financial deepening,” the idea that the U.S. needed super-sized banks to take advantage of coming growth in consumption of financial services by emerging markets. Why exactly emerging market consumers will want to spend new wealth on the kind of lousy financial products which nearly brought down the U.S. was never fully explained. Suffice to say that any financial deepening which includes the growth of finance in the U.S. as a proportion of the economy will only increase risk to taxpayers and do so, as it has for the past 25 years, without producing anything of commensurate value.

So who should be Fed Chief? Janet Yellen clearly has the inside track, and it is safe to assume that she’d carry on largely as Bernanke has begun, with easing and bond buying.

Sadly, she may have a harder time. Opinion is highly divided among Fed policymakers over the wisdom of continuing with low rates, and though the data does not paint a picture of an economy ready to stand on its own two feet, it doesn’t do much either to vindicate the policies we’ve been following.

Maybe it is time for an outsider, and Paddypower has duly supplied one, putting iconoclast Nassim Nicholas Taleb as a 1000-1 shot in a field of a dozen potential candidates. Taleb, best known for the concept of the black swan, the big-impact, hard-to-predict outlier, is tough-minded, understands risk and, unlike most of the competition, wants bankers to truly have skin in the game.

We could do worse than that, and we very likely will.

(James Saft is a Reuters columnist. The opinions expressed are his own)

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)

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