President Obama's chief economic adviser, Larry Summers, was interviewed on PBS late last week about the state of play on financial reform. In an odd, shifty-eyed discussion, Summers admits "mistakes were made," but none by him.
Maybe Summers felt compelled to defend himself after President Clinton recently admitted to ABC reporter Jake Tapper that he should not have listened to the advice to deregulate the derivatives market from Summers, Robert Rubin and others. Clinton admitted: "On derivatives, yeah I think they were wrong and I think I was wrong to take [their advice] because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don't need any extra protection, and any extra transparency."
Summers' Dubious Past, and Current Bogus Argument
Between 1992 and 2001, Summers held various positions in the U.S. Treasury Department, including that of Treasury Secretary from 1999 to 2001. Along with Robert Rubin and Alan Greenspan, Summers brought about elimination of key U.S. financial regulations including the Glass-Steagall Act. He was particularly aggressive in his efforts to block regulations of derivatives, regulations that might have prevented the economic meltdown the U.S. suffered in 2008. According to economist Dean Baker, "The policies he promoted as Treasury Secretary and in his subsequent writings led to the economic disaster that we now face."
Summers was wrong in the 1990s, and he is wrong now. In his PBS interview, Summers says that capping the size of too-big-to-fail banks, as has been proposed by Senators Sherrod Brown (D-Ohio) and Ted Kaufman (D-Delaware) is the wrong approach. Inexplicably, Summers says we should not clamp down on big banks because small banks pose hazards as well.
In a Sunday column Baker points out the absurdity of this argument, noting that too- big-to-fail-banks (TBTF) have a special status. "Creditors know that the government will bail them out if a TBTF bank gets in trouble, they will keep the money flowing regardless of how risky the activities of the bank. This is a recipe for many more bailouts," says Baker.
Summers' self-serving interview on PBS pushed normally sedate Nation magazine writer William Greider over the edge. In a column entitled "Professor Pants-on-Fire," Greider characterizes the Summers' interview as "aggressively misleading to plain deceitful."
"Regulators didn't have authority in a comprehensive way to monitor the derivatives market." This is a flaming lie. The principal regulatory agency -- the Commodity Futures Regulatory Commission -- was actually preparing to impose stricter oversight on derivatives in the late 1990s, when Larry Summers stopped it. Summers and Republican allies intervened in 2000, with legislation that castrated that agency and prohibited it from acting further. Derivatives exploded thereafter.
Stronger Reforms are Needed
By characterizing the recklessness, greed and fraud on Wall Street as "mistakes," Summers is promoting the view that a few tweaks to the system are sufficient. Senators Brown and Kaufman are not buying it, pressing ahead in their effort to pare down the size of systemically dangerous institutions. Senator Blanche Lincoln (D-Arkansas) is not buying it either, pushing for much stricter regulation of derivatives than has been proposed by the Obama administration. It was reported late on Sunday, that Lincoln's proposal to force banks to spin off their derivatives operations will be incorporated into the sweeping regulatory legislation slated be debated in the Senate today, despite Obama administration opposition.
If true, this is a stunning development shows that momentum is building for even stronger financial reforms than has been proposed by the White House -- and Larry Summers -- to date.