Analyzing Larry Summers

If you haven’t already, do check out Ryan Lizza’s excellent New Yorker article on Larry Summers and the Obama Administration, which all the blogosphere has been talking about. A few points.

1. If you are going to do the “Summers at Harvard” leg of the narrative, please bring up the Shleifer Adventures in Russia, a deal that was probably more important in Summers leaving Harvard than him harassing Cornel West. I defer in my love of Shleifer’s Limits of Arbitrage Paper to no man, but that story is really skeezy (from the first link, “Some day [Harvard] doctoral students will compare and contrast its relationship with the Russian government in the 1990s to the University of Chicago’s relationship to Chile in the 1960s.” Well said.), and needs to part of the standard narrative of what Summers did at Harvard.

2. I think everyone needs to consider the beginning of the Obama adminstration in the light of having to stop the bleeding on several key issues:

The urtext of economic policymaking in the Obama White House is a fifty-seven-page memo to the President, prepared in late November and early December of last year, by Summers and his deputy, Jason Furman. It has a five-page executive summary, and forty pages of comprehensive discussion about nearly every economic and budgetary issue that the new President would face in his first months in office—the stimulus, TARP, housing policy, the state of the automobile industry, the deficit, potential budget savings, regulatory reform….

The day after Geithner was confirmed, he had sat down in the Oval Office with Obama, Biden, and Summers. “We have to understand these five big things we’re stuck with that we inherited and that we’re going to have to solve and that are going to be very difficult,” he said. On his list were Fannie Mae and Freddie Mac, A.I.G., and—most important—the big banks that some feared were teetering on the edge of insolvency, specifically Bank of America and Citigroup. As Christina Romer had done in Chicago, Geithner warned that the problem was worse than the public understood, and would require more intervention than was popular.

I really look forward to the day when all this information is available in full for public reading. We often understand “The new person has to clean up for the old person” as a general idea, but here we have a half dozen incredibly urgent issues that the President has had to deal with. From losing the supply chain of the auto companies in a bad weekend to losing the entire financial sector in a bad weekend, Obama has had, and still does!, to deal with a nightmare compared to what most Presidents have had to deal with.

This leads to my absolute favorite quote of the current administration, from Austan Goolsbee to critics:

Look, we enter the government essentially in a hotel that is on fire. We’re throwing people from the windows into the pool to save their lives and this is the evaluation of the Olympic diving committee: Well, the splash was too big.

3. I really don’t want to redo the nationalization debates, but Felix Salmon, Tim Fernholz, and Matt Yglesias all have smart things to say you should check out.

Here’s a good quote from the article:

The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As [Obama economic official Gene] Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)

Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.

The results of the stress tests showed that the banks were not in as dire shape as commonly believed. Most of the nineteen banks were able raise money privately. “It worked,” the Treasury official said. “People had money to put into banks. The nationalization crowd would have had the government putting all that money in.”

Before we dig in, let’s get a sense of bank sizes from the stress test:

I was very vocal for temporary bank nationalization then. I thought it could be pulled off if the assets of top banks, the ones who went through the stress test, were guaranteed, and we’d temporarily nationalize the 2 worst of the top 4 banks. I thought then the nightmare scenario, nightmarish enough that I don’t think I would have pulled a trigger, is that the government went to seize Citi and they fought it under the grounds the government had no legal authority, and we’d have a year of the stock market freaking out on court rulings while the actual status of Citi, and by proxy the banking sector as a whole, was entirely in legal limbo. Perhaps there were ways around this, but I didn’t see any proposed at the time (and as Yglesias points out, they didn’t seem to be looking too hard).

The bargain you had to make was that if you were to de facto guarantee the banking assets of the largest banks you’d have to push hard at the same time for legal authority to wind down any systematically big financial institution as well as push for tighter regulations on the fundamental characteristics of banks themselves. I didn’t see that as likely to happen at the time, and see it as less likely now, though I still hold out hope.

4. You should read it all, so I won’t blockquote any more sections. I found the repeal of Glass-Steagall coverage weak; I might agree that it didn’t add to the cause of the crisis, but in terms of having to deal with a crisis ongoing it’s made it significantly harder to close banks, or even approach the terms of doing so, when they are combined entities. To echo Volcker, we have a safety net on commercial banking for a reason, and allowing investment banking to access this safety net, often no questions asked, does double damage. And it makes the recovery period significantly harder to manage.

Comments

[Perry B:]

An interesting article. It is interesting. If I am reading correctly that the Obama administration is against Nationalization. That is good. I feel safe in their direction. He has the largest battle in worl history to fight to keep our freedom. Who knows if the American people will figure out in time, that he is on the side of freedom. To point the finger of shame at the right people. Rome did not fall because Ceaser was a fool. Rome fell because of a corrupted, out of control Senate. I read an article where Citi is one of the richest banks in the world ranked in the top fo banks. Yet the political rhetoric put out by a biased news media, has proclaimed they are insolvent since this recession began. So who would one believe? We as Americans need to identify, and bring to light the real enemy which is Congress and thier lobbyist pals. Who have the media paid for and pull the greedy strings of change their way. Promoted and supported by the counterfeiters at the FED.

Oct 07 08:43 AM

[MarketGuy:]

One only has to review any politician's tax returns, former employers, or political contributors to see their priorities, as well as how "in touch" they are with America and its needs.

Oct 07 12:50 PM

[Buckoux:]

"I thought then the nightmare scenario, nightmarish enough that I don’t think I would have pulled a trigger, is that the government went to seize Citi and they fought it under the grounds the government had no legal authority, and we’d have a year of the stock market freaking out on court rulings while....."

.....while tea, or it's symbolic substitute, would have been tossed into every harbor in America by citizens costumed as "Native Americans".

Oct 07 02:06 PM

[Gary A:]

OMG, I can't believe that people are writing like this. Clearly you had the authority if you read the guidelines of the Bank of International Settlements, to take over any bank at the local level, even multinationals. People who say otherwise should be prosecuted for fraud.

And here is another fraud perpetrated by Summers, ie, that unemployment is a lagging indicator. It is, rather, according to Pimco, a leading indicator. Why? Because these jobs are gone forever, and the consumer is tapped out.

But Summers and the insiders bailed out their buddies with money that should have gone to workers, who need deleveraging more than banks. Without the consumer this economy is dead in the water, yet Summers bailed out his cronies instead, laboring under the false notion that this is an ordinary recession. It is not. If unemployment is a leading indicator, it is NOT NORMAL.

Obama better be listening to reason here. He simply cannot continue to listen to Summers and Geithner, two criminal minds.

Oct 07 02:09 PM

[Gary A:]

And one more thing. A true nationalization would NOT have had the government putting all the money in. That is a LIE. The bondholders, who Summers protected as they are levered by hedge funds, would have had to take a hit.

The cronies would not allow that and they rule the financial world. But the crisis is not over. Until the consumer delevers, which may be years and years, there will be no real recovery. Banks are still in danger and our credit system is threatened by lack of demand.

Oct 07 02:14 PM

[fed_alchemy:]

The new yorker piece was crap it took till page 7 to read what summers about, I could'nt speed read fast enough to finish.
jason722 ...thumbs up

Oct 07 02:24 PM

[Alan Young:]

Well, most people who comment on this have picked sides, and are just polishing their "bad guy" rhetoric here. I don't think the story is that simple. Even if senators, regulators, and managers made bad decisions, it doesn't make them *all* irredeemably evil, or even irredeemably clueless.

The previous administration was too married to the ideology of deregulation to pay any attention to fixing the problems as they emerged. By the time it was a crisis, they were lame ducks and not interested. Being skeptical about the benevolence of any political party is a valid part of truth-seeking, but it's a matter of degree. To say that the new administration shares the culpability and lack of credibility of their predecessors is to extol cynicism over facts.

Oct 07 02:33 PM

[Gary A:]

Alan, both parties are at fault. IMO the Bank of International Settlements allowed shadow banking and the Fed looked the other way as this system was imported to the US in the form of liar loans.

This was a ponzi SCAM. And it happened under the watch of the BIS, the home bank of the central banks.

Making the Fed the financial watchdog king is putting the fox in charge of the hen house. Just remember, Rubin, Greenspan, Frank, Gramm, etc all had something to do with making Wall Street into a casino. Both parties were in the pockets of the rich banks. And now the consumer, the engine of the world, is broke. Yet no one is prosecuted for this fraud.

They may get around to prosecuting the foot soldiers like Mozillo, but what about Geithner, Greenspan, Summers, Rubin, Frank, Graham, Dodd, etc. etc? If you commit a crime that is high up enough, no one gets prosecuted. I think Voltaire said something like that.

Oct 07 02:41 PM

[Larrysyr:]

The comments stream reminds me how easy it is to blast away in anger after an enterprise fails. I think I would rather figure out what happened and how we can avoid repeating the mistakes that got us into the mess.

Failures, crises, etc. usually occur because risky decisions turned into sour results. The decisions themselves may have been prudent (or maybe not), but the results unquestionably became negative. The very definition of risk means that whatever decision you make, even a good decision, could result in failure.

So we, as a political economy failed. A series of risky decisions didn't work out as intended. It happens. It's bad. Time to move on.

Maybe the main players were ill-motivated. I don't think that's a productive perspective. While nobody gets honor in this mess, somebody gets to clean up. Do you blame the janitor when your office gets dirty?

I didn't like Bush; I do like Obama. I still don't think finger-pointing is worthwhile. I think we need to figure out how to get the train back on the tracks and get on with our lives.

Oct 07 03:03 PM

[bindlepete:]

This is post facto fancy dancing to justify a host of major self serving decisions. Greenspan and Clinton started the mess and all to promote their own personal agendas. Rubin and Summers piled in and though their system of market discipline would balance it all out.

But no one was watching the store so Moody's and S&P went along for the buck, the risk of Investment Bankers was transferred to the guaranteed banks derrivatives cma into big time play for other peoples money and personal rewards the BLS took a dive and continued to pervert the statistics. Home mortgages and ownership became a right and then on=ce trouble was snesed forts with LTCM's bail out for fun and friends the blood was in the water and the real sharks came to feed.

HP and his home base GS smelled the blood and bought the oversight gang with threats of catastrophy and threw Basel II out the window and stuck old Aunt Mini with the Bill.

Talk about a "Death Panel" the Rebublicans invented it as they condemned her to a life time of Wal Mart Greeting. with theft and the perversion of the CPI.

Hey there is no end of villians but one honest man left standing- regretably outside the door- Paul Volker.

Oct 07 03:43 PM

[fed_alchemy:]

On Oct 07 03:03 PM Larrysyr wrote:

I voted for Obama to change the past regressions and he loads his cabinet with those complicite in the disaster. Transparency through smoke and mirrors doesn't settle well here.The Dems blew their only chance at credibility and the populist party will get > back on the tracks and get on with our lives.

Oct 07 04:15 PM

[User 481361:]

No, we need to jail those who committed massive fraud. Those looking to "forget the past" and "look to the future" never express such sentiments when a low level person has failed.THAT person must be held accountable.
We learn NO lessons, the "lessons" of the 1930's were discarded by criminals like Taxcheatgeithner, Robert Rubin, Phil Graham etc.
But, claiming to have learned lessons is much better than facing jail time, for the FAILED elites. And they must be called "failed men" much more often.


On Oct 07 03:03 PM Larrysyr wrote:

> The comments stream reminds me how easy it is to blast away in anger
> after an enterprise fails. I think I would rather figure out what
> happened and how we can avoid repeating the mistakes that got us
> into the mess.
>
> Failures, crises, etc. usually occur because risky decisions turned
> into sour results. The decisions themselves may have been prudent
> (or maybe not), but the results unquestionably became negative. The
> very definition of risk means that whatever decision you make, even
> a good decision, could result in failure.
>
> So we, as a political economy failed. A series of risky decisions
> didn't work out as intended. It happens. It's bad. Time to move on.
>
>
> Maybe the main players were ill-motivated. I don't think that's a
> productive perspective. While nobody gets honor in this mess, somebody
> gets to clean up. Do you blame the janitor when your office gets
> dirty?
>
> I didn't like Bush; I do like Obama. I still don't think finger-pointing
> is worthwhile. I think we need to figure out how to get the train
> back on the tracks and get on with our lives.

Oct 07 04:27 PM

[Robespierre:]

So this is how the perpetrators of the biggest heist in the world re-write history...

Oct 07 04:42 PM

[Big Bubbette:]

I never blame myself when I'm not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn't my fault that I'm not hitting, how can I get mad at myself?
Yogi Berra


On Oct 07 02:41 PM Gary A wrote:

> Alan, both parties are at fault. IMO the Bank of International Settlements
> allowed shadow banking and the Fed looked the other way as this system
> was imported to the US in the form of liar loans.
>
> This was a ponzi SCAM. And it happened under the watch of the BIS,
> the home bank of the central banks.
>
> Making the Fed the financial watchdog king is putting the fox in
> charge of the hen house. Just remember, Rubin, Greenspan, Frank,
> Gramm, etc all had something to do with making Wall Street into a
> casino. Both parties were in the pockets of the rich banks. And now
> the consumer, the engine of the world, is broke. Yet no one is prosecuted
> for this fraud.
>
> They may get around to prosecuting the foot soldiers like Mozillo,
> but what about Geithner, Greenspan, Summers, Rubin, Frank, Graham,
> Dodd, etc. etc? If you commit a crime that is high up enough, no
> one gets prosecuted. I think Voltaire said something like that.

Oct 07 06:34 PM

[Zmartmoney:]

Horse hockey!! If Obama is who you would like to believe he is, then his words and his actions would have been greatly different. He is a Socialist. He will nationalize healthcare if it's at all possible, over our dead bodies. He is very big into political payback and is a Statist to the max. The ignorant and conceited press is in thrall to their own reflections in the mirror, and Congress is a giant baby sucking its thumb and screaming for more of whatever seizes their childish attention for the moment. It's truly time to "throw the bums out." Failure to do that will be a disaster of epic proportions. But, yes, the Fed are counterfeiters - unConstitutional counterfeiters, at that.

On Oct 07 08:43 AM Perry B wrote:

>He has the largest battle in worl history to fight to keep our freedom. Who knows if the American people will figure out in time, that he is on the side of freedom. To point the finger of shame at the right people. Rome did not fall because Ceaser was a fool. Rome fell because of a corrupted, out of control Senate. I read an article where Citi is one of the richest > banks in the world ranked in the top fo banks. Yet the political rhetoric put out by a biased news media, has proclaimed they are insolvent since this recession began. So who would one believe? We as Americans need to identify, and bring to light the real enemy which is Congress and thier lobbyist pals. Who have the media paid for and pull the greedy strings of change their way. Promoted and supported by the counterfeiters at the FED.

Oct 07 07:16 PM

[Zmartmoney:]

We've just been held up in an alley-way and you think we're just "blasting away in anger..." No one believes that these were "risky decisions." The gangmembers that held us up in the alley-way weren't doing cost/benefit analysis - they were robbing us. Hardly a matter for business analysis - more a matter for jail time - but will we see any doled out to those that are truly deserving? no. They will all cover for each other and Obama will continue to milk them for political influence and we're in big trouble.

On Oct 07 03:03 PM Larrysyr wrote:

> The comments stream reminds me how easy it is to blast away in anger
> after an enterprise fails. I think I would rather figure out what
> happened and how we can avoid repeating the mistakes that got us
> into the mess.
>

Oct 07 07:30 PM

[ebworthen:]

A four page executive summary tells you that they are piling B.S. on top of a big pile of B.S.

Blame the previous administration...yeah right.

Bush and Paulson were wrong to bail out the banks and AIG.

If you do something immoral to cover immorality you still have a steaming crock of B.S.

You can intellectualize it, rationalize it, equivocate over it, chant some economic mumbo-jumbo, and you still have a steaming pile of B.S.

To tax the average citizen to cover the bad bets of hedge funds and banks and insurance companies and politicians taking campaign contributions and lobbying money and bribes, etc., etc. is immoral and the payment is a noose on a rope from the nearest tree or lamppost or traffic signal.

You can't cure immoral over-leveraging and outright theft from the average citizen with more over-leveraging and theft.

We have been kicking the moral can down the road for decades, and when it comes to a stop and can be kicked no more the comeuppance will be a historic event.

Sad...but an immutable truth of the history of humanity.

Oct 07 10:14 PM

[Jason Rines...:]

Thank you for calling a spade a spade. Capitalism was ground into
dust. We went off the gold standard and the country was never the same.

Celebrity Finance executives and CEO's were all the rage in the last twenty years. A culture of ego once it builds momentum is hard to stop. Legitimate global crisis such as 911 didn't help. But
repealing Glass Steagall was no accident.

Failing to serve the public at large FIRST by 2005 was no accident. Continuing hiding the numbers to make more time for personal exit to mandrake onto China is heinous. Think the Chicoms and Russians surprised you Larry and Tim this year? You haven't seen anything yet for what they have in store. I know a little bit about PtP banking. I was offered to help the East. I declined. My country of 300 m come first! Not my little band of brothers. The intent of these nations is military in nature of divide and conquer and not nice.


On Oct 07 02:41 PM Gary A wrote:

> Alan, both parties are at fault. IMO the Bank of International Settlements
> allowed shadow banking and the Fed looked the other way as this system
> was imported to the US in the form of liar loans.
>
> This was a ponzi SCAM. And it happened under the watch of the BIS,
> the home bank of the central banks.
>
> Making the Fed the financial watchdog king is putting the fox in
> charge of the hen house. Just remember, Rubin, Greenspan, Frank,
> Gramm, etc all had something to do with making Wall Street into a
> casino. Both parties were in the pockets of the rich banks. And now
> the consumer, the engine of the world, is broke. Yet no one is prosecuted
> for this fraud.
>
> They may get around to prosecuting the foot soldiers like Mozillo,
> but what about Geithner, Greenspan, Summers, Rubin, Frank, Graham,
> Dodd, etc. etc? If you commit a crime that is high up enough, no
> one gets prosecuted. I think Voltaire said something like that.

Oct 08 12:23 AM

[Jason Rines...:]

No I don't blame the janitor. I blame manager that ordered the janitor to dirty my office and then ordered him to come back in my office and demand fees to clean it up. Is this what passes for intelligence these days in Washington?

30 percent of the country won't be moving on for a decade. Talk about the encapsulation effect.

The people would help clean up the mess and mitigate the damage to yourselves but no one can see the books. By the find the public does civil unrest will be rampant. Then what? Attempt to silence the rape victim?

I have made my own mistakes in the past. I take accountability for them, not hide behind the point of a gun. I worked with Kovlowski and Mark Schwartz. I could have easily committed fraud and called it a grey area. It's simple. If your know your not returning value it's fraud. Hey in the end we're all dead. I will die with my dignity and my family not be reminded for generations what a parasite I was. I had some DC connections. There are solutions but none of you want to implement them. So please stop pissing on my head and telling me it's raining.


On Oct 07 03:03 PM Larrysyr wrote:

> The comments stream reminds me how easy it is to blast away in anger
> after an enterprise fails. I think I would rather figure out what
> happened and how we can avoid repeating the mistakes that got us
> into the mess.
>
> Failures, crises, etc. usually occur because risky decisions turned
> into sour results. The decisions themselves may have been prudent
> (or maybe not), but the results unquestionably became negative.
> The very definition of risk means that whatever decision you make,
> even a good decision, could result in failure.
>
> So we, as a political economy failed. A series of risky decisions
> didn't work out as intended. It happens. It's bad. Time to move
> on.
>
> Maybe the main players were ill-motivated. I don't think that's
> a productive perspective. While nobody gets honor in this mess,
> somebody gets to clean up. Do you blame the janitor when your office
> gets dirty?
>
> I didn't like Bush; I do like Obama. I still don't think finger-pointing
> is worthwhile. I think we need to figure out how to get the train
> back on the tracks and get on with our lives.

Oct 08 12:46 AM

[Jason Rines...:]

Perhaps but lots of hard drive space real cheap these days. The attempt for a rounder world continues. Look on the bright side, they CB model is soon to be dead. Long live the CB model! It was wonderful after the dark ages and evolution is always guaranteed in this universe.


On Oct 07 04:42 PM Robespierre wrote:

> So this is how the perpetrators of the biggest heist in the world
> re-write history...

Oct 08 12:55 AM