The Case Against Larry Summers
Lawrence Henry Summers is one of the world's most eminent economists. He won the John Bates Clark Medal given every two years to the nation's best economist under 40—an award so competitive that some economists say it's as prestigious as a Nobel Prize. His fellow economists cite his work even more frequently than that of Federal Reserve Board Chairman Ben Bernanke. Summers also has more experience than any senior U.S. official in memory, including Bernanke, in dealing with the financial crises that have become the regular responsibility of Fed chairmen since the Great Depression. He started in the Reagan administration, when he was senior staff economist on the Council of Economic Advisers, then moved on to become Treasury secretary under President Clinton, and, finally, President Obama's chief economic adviser in the middle of the worst financial crisis since the 1930s. Summers holds mostly middle-of-the-road but profoundly informed views on finance that make him fairly uncontroversial as a prospective steward of the Fed's mandate, which is to control inflation, reduce unemployment, and guide economic growth.
So, on paper, Summers is a superb candidate to succeed Bernanke in a post that the brilliant 58-year-old Harvard professor has pined for since his earliest days in Washington, according to longtime associates. Obama is reportedly fond enough of Summers that he may name him in the next few weeks, passing on a chance to appoint Janet Yellen, the widely admired current vice chairwoman, who is said to be the other major contender, as the first female Fed chief in history.
And yet Summers is a very risky choice for chairman—far riskier than Yellen, who would undoubtedly win overwhelming confirmation and was recently rated the Fed's most accurate forecaster since 2009 on issues from growth to jobs to inflation.
The Federal Reserve chairman wields such enormous power, with so little accountability, that he or she is said to be the second-most-powerful person in government after the president. Decisions are habitually made in secret. The job requires a person of great personal tact, subtlety, and self-control. It requires someone who knows how to build consensus at the highest levels for the right kind of policies—someone who possesses the maturity and character to admit error and shift course when needed.
But, according to numerous accounts from those who have worked with him, Summers has often displayed the opposite attributes during his long career. Behind the scenes, he has used his power, combined with intellectual arrogance, to bully opponents into silence, even when they have been proved right. He has refused to allow his dissenters a voice at the table and adopted a policy of never admitting errors.
And Summers has made a lot of errors in the past 20 years, despite the eminence of his research. As a government official, he helped author a series of ultimately disastrous or wrongheaded policies, from his big deregulatory moves as a Clinton administration apparatchik to his too-tepid response to the Great Recession as Obama's chief economic adviser. Summers pushed a stimulus that was too meek, and, along with his chief ally, Treasury Secretary Timothy Geithner, he helped to ensure that millions of desperate mortgage-holders would stay underwater by failing to support a "cramdown" that would have allowed federal bankruptcy judges to have banks reduce mortgage balances, cut interest rates, and lengthen the terms of loans. At the same time, he supported every bailout of financial firms. All of this has left the economy still in the doldrums, five years after Lehman Brothers' 2008 collapse, and hurt the middle class. Yet in no instance has Summers ever been known to publicly acknowledge a mistake.
Wielded by a Fed chairman, those personal traits and policy attitudes are a potentially combustible mix at a time when the Federal Reserve has become, more than ever, the most powerful economic institution on earth, and when re-regulation of the global financial system is substantially in the hands of the Fed. The man whom Summers once considered a model chairman, Alan Greenspan, offers an example of the dangers of being too certain of one's views without much accountability. Back in 1994, Congress instructed the Fed to police unfair and deceptive practices related to mortgage loans. But because the chairman believed in minimal regulation, no rules were ever written; Greenspan quietly slapped down efforts by governors such as Ed Gramlich to warn him; and the Fed did little to intervene in the emerging subprime fraud.
There is no question about Summers's intellect and experience. But would he have the character, temperament, and maturity to listen to a naysayer enough to admit error and reverse course in the next crisis? His history suggests otherwise.
Nobody who has spent so much time working in government has a perfect record, but Summers has rarely shown enough humility to wonder whether his answer may not be the best one—an attitude that has led him to sideline opponents no matter the merit of their arguments. "As everybody knows, Larry is very smart, and he likes to show it," Alan Blinder, who served on Clinton's Council of Economic Advisers and later as Fed vice chair, said in an interview a few years back. And Summers's policy errors, when he's made them, have been outright catastrophic.
As deputy Treasury secretary under Robert Rubin in the mid-'90s, he dismissed those experts, such as Blinder and Nobel-winning economist Joseph Stiglitz, who wanted a more cautious opening up of global capital flows; in the years since, these rampaging tides of "hot" capital have caused asset bubbles in one economy after another, with too little institutional restraint on the part of deregulated banks. Summers famously—even brutally—fought efforts to regulate derivatives, which are essentially bets on the rise and fall of asset values and which, escalating into the multiple trillions of dollars, helped to put many financial firms at risk. And early in the Obama administration, he worked hard to marginalize a widely revered former Fed chairman, Paul Volcker, who pushed for greater financial regulation.
Summers helped midwife a major series of policy errors dating back 20 years that led directly to what many economists now believe was the worst financial crisis ever. In particular, Summers's opponents—he faces a phalanx of opposition among Democrats on the Hill—point to the Commodities Futures Modernization Act of 2000, which effectively deregulated the global market in over-the-counter derivatives and was Summers's signal achievement as Treasury secretary. The final report of the Financial Crisis Inquiry Commission convened by Congress in 2009 puts the government's failure to rein in these derivatives at "the center of the storm."
Summers has, since then, engaged in what appears to be an effort to deny or cover up these errors and posture as a champion of regulation—an act of misrepresentation that flabbergasts many former colleagues and congressional opponents. Some progressives who want tougher regulation of Wall Street, such as Democratic Sen. Maria Cantwell of Washington, say they couldn't vote for him unless they heard some kind of mea culpa. "Nobody is going to get my support unless owning up to mistakes of the past," Cantwell told the Seattle Post-Intelligencer recently. Sheila Bair, the Republican former head of the Federal Deposit Insurance Corp., and a leading proponent of greater regulation, agrees. "One of the things that bothers me about Larry is that he's never really said he made any mistakes," Bair said in a recent CNBC interview. "That worries me." Over the summer, in an unusual move, 19 Democratic senators and one independent sent Obama a letter endorsing Yellen for the Fed, meaning that a Summers nomination would probably be as tough and controversial as Chuck Hagel's was as Defense secretary.
Other critics say the nature of the mistakes bothers them as much as Summers's tendency to absolve himself. "If you didn't make a lot of mistakes, that would be one thing," says Stiglitz, who battled Summers over a wide range of issues during the Clinton administration, when Stiglitz was chairman of the Council of Economic Advisers and then chief economist at the World Bank. "In terms of judgment, in forecasting his record has been atrocious. He underestimated the severity of [the] 2008 crisis. He underestimated the East Asian crisis [of the late 1990s]. He didn't understand that simply raising interest rates would have the horrible effects" in Indonesia.
Even as Summers left a trail of bitterness across two decades of high-level policy fights in Washington, he gained many defenders: senior officials who admire his acumen and say his personal issues are exaggerated. Most tend to be his former colleagues in the Clinton administration, who themselves have reason to play down the deregulatory mistakes of that era. Still, Summers is admired for sticking by his subordinates, who often return his loyalty in kind. He possesses a dry, sometimes self-deprecating, sense of humor and a restless intellectual curiosity that is said to have appealed to Obama and might be healthy in a Fed chief, absent other personality flaws. Throughout his career, Summers has impressed superiors with his intellectual pyrotechnics and an amazing facility to argue both sides of debate better than anyone—to the point where it made people uncertain about where he stood. These abilities turned Summers into a first-rate briefer, a quality that Obama greatly appreciated. Summers can also point to some important achievements that have helped with America's finances, such as the introduction of inflation-indexed bonds to the Treasury.
Summers's allies say his arrogance is more unconscious than malicious, a product of his aggressive search for new thinking. In a 2010 interview, Clinton's tough-talking trade representative, Charlene Barshefsky, recalled when Summers, as Treasury undersecretary in the 1990s, humiliated her deputy in a room full of staffers, telling the deputy that he would have flunked him as a student if he'd made such weak arguments about a trade issue. Afterward, the diminutive Barshefsky walked up to the beefy Summers and said, "If you ever do that again, I'll break your fucking knees." Summers was shocked, and perhaps dismayed, that he'd offended a Cabinet official. "He didn't even know what he did," Barshefsky recalled. Summers later called the aide to apologize.
But the danger of such a proclivity toward arrogance and disdain of others is that the Federal Reserve chairman operates with few restraints. (That's one reason Congress regularly tries to force more accountability on the Fed board.) True, as a policymaker, Summers is no bomb-thrower; he has moved cautiously his entire career, and he's no stranger to building consensus, though it has often been behind deregulation. But if he were Fed chairman, the U.S. and global economies would get, for at least four years, a domineering personality in a position to silence differing views. That matters now more than ever. The Federal Reserve oversees the large banks and the nonbank "systemically important financial institutions" at a time when, in the wake of the economic crisis, re-regulation of the global financial system is a crucial issue. But Summers spent most of his career in Washington advocating for deregulation and Wall Street. He has worked as a paid adviser for Citigroup, Nasdaq OMX Group, the D.E. Shaw & Co. hedge fund, and the venture capitalists at Andreessen Horowitz, according to The Wall Street Journal. "He has been seen to be, and probably is, captured," says longtime foil Stiglitz.
Recent history offers two contrasting examples of why Summers's chronic inability to concede error and his predilection to favor Wall Street are worrisome. Summers's former mentor, Greenspan (with whom he was lionized on the cover of Time), admitted no dissent from his views when he was Fed chairman. Unable to see past his libertarian ideology, Greenspan presided over deregulation for 18 years, often with Summers's support, swatting away all efforts to oversee banking. That led to the 2008 crash.
Greenspan's successor, Ben Bernanke, by contrast was able to admit he'd been wrong in initially underestimating the impact of the subprime-mortgage disaster. A Republican nominee, Bernanke super-empowered the Fed, expanding its lending authority in unprecedented ways to rescue the economy from a downturn and financial panic that he realized was all too similar to the one that led to the Great Depression, his life's focus as a scholar. Bernanke's actions at the Fed, in fact, dwarfed anything the Bush or Obama administrations did on the fiscal side. He summoned the integrity and humility to reverse himself, with profound effects. Could Summers, who tended to underestimate the systemic nature of the crisis, have done the same?
THE DEREGULATION WARS
After the Soviet Union collapsed, a new orthodoxy began to take shape, and Summers was one of its loudest proponents. It held that Washington should free up the global economy by opening capital flows around the world, exempt swaps and other new derivatives from regulation, and protect the growing financial conglomerates from any further oversight. To that end, Summers and his allies backed the 1999 repeal of the Glass-Steagall law, permitting commercial banks to jump into risky investment-banking activities. Summers saw the repeal as "historic legislation" that would replace Depression-era rules "with a system for the 21st century." He also came to extol Greenspan and to dogmatically support the latter's libertarian views of the essential rationality of financial firms and their ability to regulate themselves, even though these views sometimes contradicted the conclusions of Summers's own academic work from the 1980s.
At the annual meeting of central bankers in Jackson Hole, Wyo., in 2005, just before the risks in the subprime market began to show themselves, University of Chicago economist Raghuram Rajan delivered a stunningly prescient paper about the growing risks in the financial system. His fundamental point—that Wall Street's giant financial institutions don't always act rationally—was also an implicit critique of senior policymakers like Summers. For years Summers had assumed that the Asian financial markets collapsed because they were not as sophisticated as those in the West and were more prone to "crony capitalism." But Rajan argued that the West might not be special. "The usual story was that emerging markets have had these big problems over last few year because of horrible infrastructure, horrible regulation, not enough disclosure," Rajan recalled later. The West supposedly had "checks and balances" that made it immune to the lunacy of the boom. Rajan was saying that these checks—the regulatory structure—had been eviscerated during the tenure of Greenspan, Summers, and others.
Standing up in rebuttal, Summers spoke of how much he had learned from Greenspan, the Ayn Rand devotee who believed that Wall Street financial institutions could always be trusted to preserve the system, and then he launched into a fierce attack on Rajan, saying he found "the basic, slightly Luddite premise of this paper to be largely misguided." Summers invoked a favorite analogy: The development of finance is like transportation. We advanced from a primitive system in which people provided their own power—they walked—to one in which they used tools they own themselves, like horses. Then we relied on intermediaries, such as stagecoach lines. Over time, the transportation system was centralized into airports and train stations. As a result, accidents, when they occurred, were much larger and more serious. But the "overwhelmingly positive" thing was that substantially fewer people died overall. The same thing was happening in finance, he said, as people came to rely on more and more sophisticated global banks. Summers allowed that, just as the Federal Aviation Administration oversees the airways, some additional regulation might be considered in the financial sector. But he warned that too many rules would damage all the positive things, such as derivatives, happening in "financial innovation."
Rajan had read the risk brilliantly, however, and three years later Summers looked embarrassingly wrong. The entire "transportation system"—the financial system, that is—went up in smoke. And the Financial Crisis Inquiry Commission later concluded that several of Summers's moves were central to the crisis. Summers was never known to concede that Rajan, who recently became governor of India's central bank, had been right.
Summers has also denied making any mistakes when he advised the president during his time as director of the National Economic Council in 2009-10. In an op-ed in The Washington Post last year, as economic growth lagged and criticism mounted that he had failed to push a big-enough stimulus measure on Obama in 2009, Summers sought to deflect any blame, saying no one knew how bad the downturn would get. "Economic forecasters divide into two groups: those who cannot know the future but think they can, and those who recognize their inability to know the future," Summers wrote. But as journalist Noam Scheiber documented in his 2012 book, The Escape Artists: How Obama's Team Fumbled the Recovery, Summers knew, as an astute economist, that the planned stimulus was too small to turn the economy around. When Christina Romer, then-chairwoman of the Council of Economic Advisers, argued that the stimulus needed to be more than twice as large as the planned $800 billion, Summers cut her out of the discussion and gave Obama, apparently for political reasons, only the option of a modestly sized stimulus. The president had "little reason to suspect that this amount was perhaps $1 trillion too small," Scheiber wrote. It may well be, as Summers suspected, that Congress would never have given Obama more, but the possibility was never even tried.
Nor has Summers ever admitted that the Commodity Futures Modernization Act of 2000, often cited as one of his main achievements as Treasury secretary, led directly to the financial crash, a conclusion of the FCIC report. Summers's sponsorship of the act was the culmination of his long fight to prevent the regulation of derivatives trading. Channeling the views of Wall Street, he believed that even a hint of regulation would send all derivatives trading overseas, costing America business. (It was the unspoken assumption in those years that what was good for Wall Street was good for the U.S. economy, and vice versa.) 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. Although she did not report to him, he dressed her down loudly. Born's deputy, Michael Greenberger, says he walked in as the call was ending. "She was ashen," he recalls. "She said, 'That was Larry Summers. He was shouting at me.' "
Summers told Born that a group of bankers had come to his ofﬁce to say it did enormous damage to their business just for her to raise these questions, and he let her know she should just stop doing it. Born later said, "I was astonished a position would be taken that you shouldn't even ask questions about a market that was many, many trillions of dollars in notional value—and that none of us knew anything about."
Even after the financial crash of 2008, Summers did not relent in his view that little else could have been done back then, despite the FCIC's report and other studies that concluded otherwise. Summers's boss and mentor, then-Treasury Secretary Robert Rubin, conceded during the post-crash hearings in 2010 that Born was "right about derivatives regulation." Even former President Clinton later admitted he should have reined in derivatives trading.
Arthur Levitt, who ran the Securities and Exchange Commission during the Clinton years, told me after the crash that he and his colleagues had made a serious mistake in pillorying Born. "All tragedies in life are always proceeded by warnings," he said. "We had a warning. It was Brooksley Born. We didn't listen to that." But Summers was still so sure of his own correctness that, when he saw Levitt on Capitol Hill in November 2008, he fought back. "I read somewhere you were saying that maybe Brooksley Born was right. But you know she was really wrong," Summers said, according to someone who overheard the conversation, which Levitt later confirmed. "Her plan was no good. And we offered a different plan."
In truth, there had been no other plan, at least not one that anyone ever tried to enact. Summers appeared to be referring to a vague recommendation, bandied about in 1997, to get the SEC to regulate derivatives broker-dealers, which never got off the ground. When I asked him about this encounter in a 2010 interview, Summers said, "Well, you know, I didn't say she was really wrong. I said the reasons [Levitt] took the position [he] took was that there was concern that Brooksley's approach was going to undermine legal certainty [about the legitimacy of trillions of dollars of derivatives trades already out on the market]. It wasn't that we didn't want to regulate derivatives. We offered a different approach." But even Levitt said this demurral missed the point: Born had seen danger in a market that no one else did at the time, and she deserved credit for that. A little magnanimity was in order. Legal certainty could have been addressed under Born's approach. "Rubin and Greenspan were probably right in saying there were outstanding contracts thrown into uncertainty," Levitt said. "But we could have grandfathered those and said that thenceforward we were going to regulate them."
In his interview with me, Summers also appeared to misrepresent his earlier position on derivatives, at least as it was remembered by others. "I never suggested the derivatives market was capable of policing itself," he said. "I pushed for what's now being discussed, to put [over-the-counter derivatives] on exchanges. We never got anywhere. In the President's Working Group Report in November 1999, the Fed dissented, but the rest of us insisted that broker-dealers be regulated."
In fact, Greenberger says, no one was discussing exchanges or clearinghouses at the time—only the simple act of "reporting" derivative trades to regulators, which is all he and Born thought was possible. Yet Summers remonstrated with Born over even asking questions. Greenberger, reached by e-mail, says that before he resigned from his post in September 1999, "I never heard word one about exchanges from any Treasury official." And when Summers, by then Treasury secretary, chaired the President's Working Group on Financial Reform that year, his report never mentioned exchanges or any other swaps regulation. "The proof in the pudding is Summers's December 2000 letter to [Sen.] Phil Gramm [a leading sponsor of the legislation] enthusiastically endorsing the CFMA," Greenberger says. "The CFMA just did not stop the CFTC from regulating. It stopped every federal regulatory entity from regulating swaps, and even state law was also almost completely preempted. What you have here is Summers's two written documents in November 1999 and December 2000 advocating deregulation, against the present claim (unsupported by any contemporaneous documentation) that he was for exchange trading of swaps at that time."
Those attitudes persisted after the biggest financial crash in history in 2008. Even during the fight over the Dodd-Frank financial-regulation law, says Greenberger, who was then helping lawmakers draft the bill, "the progressive groups had to fight like hell to get exchange trading in the legislation. My distinct memory is that neither the White House nor Treasury during the legislative battles on this question in 2009 supported exchange trading of swaps. In fact, they endorsed an initial House committee draft in early October 2009 that not only did not require exchange trading but made clearing 'voluntary' on the part of the banks."
LIKE A BOSS
How would all of this play out at the head of a sprawling organization with fractious constituencies? Summers's time as president of Harvard University is instructive. By most accounts, it was a disaster, because of his temperamental unsuitability for the job. His time there was marked by series of indiscreet remarks and policy insensitivities. First, he offended African-American scholars by questioning the research and work habits of the author and critic Cornel West, who promptly left for Princeton. Then, at a casual forum with students in January 2005, Summers suggested that one reason there were so many more men than women in top science and engineering positions was a "different availability of aptitude at the high end" between the sexes. One participant, Nancy Hopkins, an MIT biologist and a Harvard graduate, got up and walked out, telling The Boston Globe later that if she hadn't left, "I would've either blacked out or thrown up." After someone else posted Summers's comments online, the controversy erupted nationally. "There was a sense, not just of a barbarian at the gate, but a barbarian in Mass Hall," says Richard Bradley, who wrote a critical book about Summers's tenure at Harvard. "Here was a guy who had seemed all too anxious to get to Washington, and when he got there seemed to internalize the values and priorities of that culture. And brought them back with him, along with a chauffeur and a press secretary and a chief of staff."
In Cambridge, he showed other signs of his aversion to admitting error. In a lecture at Harvard Business School in early 2002, Summers harshly criticized a paper cowritten by a newly minted Ph.D., Rawi Abdelal. The paper had suggested that Malaysian Prime Minister Mahathir Mohamed's decision to impose capital controls during the Asian economic crisis, which Summers had opposed at the time, may have been right after all. Some economists had already begun arguing that the tactic had worked—Malaysia's economy was now performing well. Summers brandished the Abdelal paper before his audience of M.B.A. students and academic colleagues—now his subordinates—and suggested that they didn't know the real world the way he did. "In my experience, capital controls don't work," Summers said. "They're always a bad idea." Abdelal later told me, "It was a little annoying in the sense that we were trying to have a Socratic dialogue. This was a Harvard Business School case study, which is supposed to present both sides. It's not like there's science and truth all on one side." Today, even the International Monetary Fund has accepted that capital controls can sometimes work.
The end for Summers at the university came after a final faux pas. A onetime protégé, economist Andrei Shleifer (along with his wife, hedge-fund manager Nancy Zimmerman), had begun investing in Russia in the mid-1990s, while he led a Harvard economic-reform program there. This violated the State Department's conflict-of-interest restrictions, and a federal court in 2004 found Shleifer liable in a conspiracy to defraud the U.S. government about the conflict. The university ultimately had to pay $26.5 million to settle the case. Yet when faculty members asked Summers to comment on the giant scandal at a faculty meeting in 2005, he repeatedly said he didn't have enough knowledge of the case. At that moment, Bradley says, Summers lost the university. ("I should have chosen my words differently at that faculty meeting. And I'll always wish that I had," Summers uncharacteristically told me in 2010.)
Unlike the Fed, Harvard is built to hold leaders accountable. On March 15, 2005, the Arts and Sciences faculty passed a motion of "lack of confidence" in Summers's leadership. He resigned just five years into the job, the shortest presidency at Harvard since the Civil War.
At every stage of his career, Summers has been helped along by friends and sponsors who have assured doubters that he has matured, that he's smoothed out his rough edges. That is what his mentor, Rubin, told the Harvard search committee. ("Rubin made us confident we weren't getting a bull," a member later told The Boston Globe.) It's what Summers himself said when he joined the Obama administration, telling me in a 2009 interview: "I suspect over time there's maybe a little less of the brusqueness that people experienced when I was younger." (Romer later complained that Summers had treated her "like a piece of meat," according to author Ron Suskind.) And it is what Summers's defenders are saying about him now as a prospective Fed chief. "We're now talking about the 58-year-old Larry, not the 30-year-old Larry," fellow Harvard economist Kenneth Rogoff told me this week.
But in the end, despite all his other sterling qualities, Larry Summers's character and temperament have never seemed to change much. And those qualities could easily run amok in the closed world of the Federal Reserve, where a single individual holds sway over the course of the entire global economy. Is that a risk Barack Obama is prepared to take?
CLARIFICATION: The anecdote about Charlene Barshefsky comes from an interview she had with the author for his 2010 book, Capitol Offense: How Washington's Wise Men Turned America's Future Over to Wall Street. An earlier version of this article implied she gave the interview more recently.