Larry Summers and Senator Dorgan

by Stormy

Lawrence Henry Summers, born 1954, mathematically precocious, entered MIT at 16, destined to become the statistician’s statistician. Later he would argue that unemployment insurance and welfare encourage long-term unemployment. The argument is a curious one: By encouraging the unemployed to say that they are looking for work, the government then measures unemployment higher than it would normally be, even though they may be totally discouraged. Ergo, safety nets are abusive. Of course, he argued as well for cutting corporate taxation and capital gains.

Whatever we may think of his arguments, I would posit that Lawrence H. Summers is the final expression of what is now wrong. We should have listened to Senator Dorgan.

He has been the financial engineer’s engineer. That he now leads the charge to “fix” a system that he oiled and greased, a system that from which he profited handsomely, should give us pause.

While President of Harvard, ignored the warnings of Iris Mack, a Harvard endowment manager who warned that the endowment fund was taking too many risks and that some of its managers may have been guilty of insider trading. Mack asked that the warning be investigated discretely. Shortly after, Mack was fired. Eventually those investment risks came home to roost. But Summers had moved on.

Later D.E. Shaw, one of the largest hedge funds in the world, hired him for his mathematical acumen in finance, dynamic hedging and Libor rates.

Summers now argues that the work gave him valuable insight into the inner workings of high finance, cleverly spinning his employment as a reason to trust him now.

Apparently, Summers earned his keep to the tune of $5.2 million dollars. D.E. Shaw feels far more comfortable with Summers now in charge of the economic recovery plan than they otherwise might.

Frankly, I do not. Financiers have become all too clever in wringing the last dollar–all in the name of market efficiency–from the unwary consumer.

Yet later at the World Bank, Lawrence Henry Summers signed off on a memo that encouraged toxic dumping in underdeveloped countries. Summers now says he did not read the memo carefully, but will take the heat for it. I might let this one pass, but Summers is a man who immerses himself in detail. He reads…carefully.

Measured against Senator Dorgan, Summers is a lightweight who never really saw the train wreck coming.

While Summers was busy being Secretary of the Treasury, Dorgan in 1999 was delivering a prescient speech on the consequences of the Financial Services Modernization Act of 1999.

Dorgan understood the dangers of the concentration of banking services, of the mergers, of financial institutions becoming too big to fail, of derivatives, of “removing barriers between banks, insurance companies, and investment firms which have existed since the Great Depression.” [See here for a synopsis of the FSMA.]

Where was the astute and brilliant Secretary Summers, protege of the Rubin who found a home in Citibank?

As far as I can tell, he saw this kind of deregulation as increasing international efficiency and competition–all arguments the moneyed boys were making.

Yes, he was one of the many Democratic leaders lending a helping hand to passage of the FSM Act. Summers has the dubious honor of sharing nesting privileges with that free market vulture Phil Graham.

Frankly, I would be far happier if we could replace clever Summers with the forthright Dorgan.

As Secretary of the Treasury, Lawrence Henry Summers was instrumental in shepherding China into the WTO. It is important to understand precisely how Summers viewed China’s entry into the WTO. For me, he displays amazing naivete.

“The agreement with China is a one-way street,” Summers said.
“China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies,” he said.

It is difficult, Summers added, “to discern any disadvantage to the United States in passing this legislation.”

According to Summers, the United States will continue to press its “full agenda with China regardless of how Congress votes,” and “China will open its markets to other members of the WTO when it joins the system, regardless of how Congress votes.”
By supporting China’s decision to sign this agreement and enter the WTO, the United States “can strengthen the hand of those who favor the reform path, and make it more difficult for China to turn back the clock,” Summers told lawmakers.

No disadvantages? China as a rich market for American goods? The now enormous trade deficit with China must be a mirage.

China has become an export platform. We have been the primary consumers of those exports. All this hype about the vast and rich Chinese market has been just another corporate fairy tale. Anyone who bothered to read how China planned to make its latest great leap forward should have seen this.

How does an impoverished third world country rapidly industrialize? Simple answer: By becoming an export platform to rich consumers. If those rich consumers have easy credit, why, what more can one ask for? Summers helped to pluck the feathers off the American bald eagle. And a scrawny bird he is rapidly becoming.

For Summers, Chinese labor, tax, and environmental arbitrage are pluses for American companies inside China. Profits would be huge–and indeed they were. Besides, cheap Chinese sweat-shop labor will force Americans to work for less. (Perhaps we should have sweat shops for financial wizards.)

But maybe I am being to harsh to label Summers as a corporate shill. Yet, Summers never spoke about labor conditions inside China. He was not worried that labor could not freely organize in China.

Competition for a fair share of the pie is never the kind of competition of which Summers speaks.
Nor was Summers worried about China’s lack of environmental safeguards. Nor was he concerned about any of the other problems that we have come to know so well: Currency manipulation, for example or export tax rebates or subsidies.

Ask Summers for vision and you will get inanities, simplistic free market drivel. Ask him about markets, and he will cleverly say that markets are self-rectifying.

Now, of course markets are self-rectifying.

For the life of me, I do not understand why this kind of remark passes as great insight. Perhaps the reason is that simpletons can handle only so much complexity in one sitting.

Yes, our trade balance will ultimately find a balance. Yes, instutions that are flawed will fail.

The questions should be:

  • Should we allow the imbalance to become so excessive that righting it will be extremely painful?
  • Should we allow financial institutions to become so large that their failure seriously endangers everyone?
  • Is everything to be measured in terms of immediate profit? And for whom?

These are the kinds of questions that Dorgan asks. These are the kinds of questions that would never occur to Summers.

Dorgan should be leading the economic recovery team. Summers is the worst of all possible choices.