The Case Against Larry Summers

.photo.right{display:none;} The job of Federal Reserve chairman is as much about character and temperament as it is intellect and experience. That’s why he shouldn’t get it.

National Journal
Michael Hirsh
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Michael Hirsh
Sept. 12, 2013, 4:15 p.m.

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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.

FIGHT­ING WORDS

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.

FIGHTING WORDS

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.

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