Larry Summers had it wrong on derivatives. And now he wants to lead on "entitlement reforms"

[Phoebe Loosinhouse]

Context - in 1998 Brooksley Born, who was the head of the Commodities Futures Trading Commission proposed that the US start regulating derivatives - you know, like the now infamous credit default swaps. She was excoriated for the suggestion by at the time Deputy Secretary of the Treasury Larry Summers.

http://www.newsweek.com/id/185934/page/1

The Reeducation of Larry Summers
He's become a champion of massive government intervention in the economy, and he's even learning how to play nice.

By Michael Hirsh and Evan Thomas | NEWSWEEK
Published Feb 21, 2009

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Rubin, Fed chairman Alan Greenspan and Summers were concerned that even a hint of regulation would send all the derivatives trading overseas, costing America business. Summers bluntly insisted that Born drop her proposal, says Greenberger. According to another former CFTC official who would recount the episode only on condition of anonymity, Born was "astonished" Summers would take the position "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."

Arthur Levitt, who was head of the SEC at the time of Born's proposal, today admits flatly that she had things right about derivatives while he, Rubin, Greenspan and Summers didn't. ("All tragedies in life are preceded by warnings," Levitt says. "We had a warning. It was from Brooksley Born. We didn't listen.") Summers told NEWSWEEK: "I believed at the time, and believe much more strongly today, that new regulations with respect to systemic risk were appropriate and necessary, but expressed the strong view of Secretary Rubin, chairman Greenspan and SEC chief Levitt that the way the CFTC was proposing to go about it was likely to be ineffective and itself imposed major risks into the market." (At the time, the Rubin Treasury Department argued against the Born proposal by maintaining that the CFTC didn't have legal jurisdiction.) Still, Summers allowed that "there's no question that with hindsight, stronger regulation would have been appropriate" before the financial crash. He added: "Large swaths of economics are going to have to be rethought on the basis of what's happened." In the past year Summers has refashioned himself as a champion of intensive financial regulation. In his last column for the Financial Times before joining the Obama administration, Summers said the pendulum "should now swing towards an enhanced role for government in saving the market system from its excesses and inadequacies."

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Summers's greatest test will be persuading Congress to vote for "entitlement reforms"—i.e., cutbacks and/or higher taxes on Social Security and health benefits for the poor and elderly. In his interview with NEWSWEEK, Summers made clear that he will urge the president and Congress to venture into an area where politicians have long feared to tread, the so-called third rail of politics (touch it and you're dead). Necessity requires it, he says—if the United States cannot curb its spending and debt, interest rates will soar and the economy will plunge once more. Summers will make the arguments used by Keynes that changed circumstances call for changed views. He will have to make the argument a little less haughtily than Keynes did, however—or than the new Larry sometimes still does.

I first heard of this on an NPR interview the other day which you can listen to here, if you choose.

http://www.npr.org/templates/story/story.php?storyId=102185942

Now, why is Obama giving such credence to a pack of losers like Rubin and Summers who pretty much got us to the place where we are right now? Is this more of the thinking that only the people who really f***ed up can unf**k things? I have to say, that is actually a very novel theory to me, one that I see practiced in almost no workplaces. Usually when you screw things up almost beyond repair you are given a pink slip.

And now they are embracing "entitlement reforms"?! I literally feel sick to my stomach. :puke:

I think Obama needs to listen a LOT more to Robert Reich and a lot less to Rubin and Summers.

[BzaDem]

1. Summers has certainly been wrong, but these are two different things.

Summers/Rubin/etc were wrong about regulation of derivatives. That being said, the effects of regulation of derivatives are much less predictable than the effects of SS/Medicare on the deficit. Right now, everyone is flocking to the dollar due to the global crisis, but when the crisis is eased, the dollar will start to react more to high deficits like currencies in other countries (though not as much, since the U.S. is still considered a major financial and political power). Interest rates on our debt will rise.

Robert "the deficit is just a number" Reich completely ignores this problem. Deficits that are large percentages of our GDP are simply not sustainable, regardless of what Robert Reich says. Something is going to eventually have to be done to reduce the deficit and eventually overall debt (after the economy recovers).

[Kashka-Kat]

2. yep I was afraid this would happen - looking more and more like Naomi Klein had it right

Its classic Shock Doctrine - the treasury's wiped out so now we have to reduce or eliminate the social programs.

Larry Summers is a neocon(aka neoliberal chicago boy) thru and thru - what do we expect?

[OHdem10]

3. This feeds the Conspiracy Theorists who firmly believe it does not

matter one whit,(which party gets the WH), RW Policy will prevail.

Even under Clinton, there was an awful lot of more Right Leaning
than left leaning.

I hope Pres. Obama is aware does some push back.

[terisan]

4. Agree. These guys are the worst examples of the "Men in Suits" culture of

runnig Wall Street and Government.

We need men with more "up to date" and less macho perspectives in finance and in policy-making; and we need a lot more women like Born.

Summers revealed his misogyny while presiding over Harvard.

I'd also like to know how involved he was in the financial investment decisions while he was there since Harvard has lost 11 billion or about 1/3 of its endowment. I know his role is being questioned but haven't read anything definitive.

I think Geithner actually has more ability than Summers or Rubin but it is their perspective and policies, and possibly self-interests that are being followed.

[lurky]

5. Milton Friedman was his ideological hero.

Summers was on the staffs of Reagan and Poppy Bush before he worked for Clinton. Geithner is one of his proteges, and is still under his sway, presumably. Summers now has a tremendous amount of influence in the handling of the economy. For instance, he was adamant that stimulus money shouldn't go to public transit, and he got his wish.

[Phoebe Loosinhouse]

6. There is a CLEAR move to the left in the country which is being missed by both the media and our

leadership as witnessed by the width and breadth of the Obama victory. Why does anyone think red states turned blue? It was a complete rejection of the status quo.Yet the media continues to proclaim that we are "center right" and moron Democrats like Evan Bayh fight the progressive wave of Americans who are tired of the economic and civic agenda being skewed to the wealthy and connected.

I honestly don't even know what center right is supposed to mean - socially liberal and fiscally conservative? socially conservative and fiscally liberal?

[lurky]

8. I agree, and the Dem leaders haven't figured that out yet.

They are still fighting the last war, and they are unable or unwilling to recognize that it is not 1994 anymore. If they don't wake up quickly, things could get ugly.

[closeupready]

9. Depends on what you mean. If it means the current crew of triangulating sellouts gets tossed,

like Dodd or Feinstein, how is that ugly? Would seem to be a step in the right direction.

[lurky]

10. I'm worried about "antipolitics".

The growing sense that democracy is ineffective, that whoever we elect will just sell us out, that all their political positions are just theater and marketing, that really they only represent wealth and power. When this attitude becomes widespread, it creates a ripe environment for demagoguery and fascism.

[closeupready]

7. Summers makes me sick.

>>the pendulum "should now swing towards an enhanced role for government in saving the market system from its excesses and inadequacies."<<

Translation: When greed destroys the banks' balance sheets, get the taxpayer to bail them out so they can start over at taxpayers' expense.

:puke: Fuck that.

[BzaDem]

11. So you would prefer that there NOT be an enhanced role for government?

Or do you just want to dump the market system?