In answer to the question, "Why on earth should Larry Summers be chairman of the Federal Reserve?" his supporters usually allege that he is great in a crisis. Whether you believe that depends on your definition of "great."
In fact, there is plenty of evidence that Larry Summers is actually kind of terrible in a crisis.
It is true that Summers has been present for more than the normal person's share of crises. But Dean Baker, of the Center For Economic And Policy Research, a liberal think tank, suggests that Summers is mainly being graded for attendance, rather than performance.
"While it is true that he took a leadership role in dealing with far more crises than Janet Yellen, the other leading contender for the job, it is hard to believe that his record in this area would be a plus if he was being graded by the outcomes," Baker writes.
Summers's track record dates all the way back to the Mexican peso crisis of 1994. Then, Summers was just an undersecretary of the Treasury, below then-Treasury Secretary Robert Rubin. Summers helped bang out a $20 billion bailout deal for Mexico that "protected big investors in Mexico's debt, like Goldman Sachs," writes Baker. Goldman Sachs was, naturally, Rubin's former employer, which raised a lot of eyebrows at the time. What has gotten less attention, Baker asserts, is that Mexico's economy has struggled since the bailout, posting the worst growth of any Latin American country in the two decades since (though he doesn't offer any data to back that up that assertion).
Update: Baker sent me a link to IMF data which do show, once you crunch the numbers, that Mexico's GDP per capita has lagged that of Argentina, Chile, Brazil and Peru since 1994.
The next crisis hit in 1997, when Summers was deputy Treasury secretary. A whole bunch of Asian countries got into trouble, and Summers and the International Monetary Fund pushed draconian bailout terms on them, which crushed their currencies. That in turn led to a surge in Asian exports to the U.S., widening the U.S. trade deficit with the rest of the world. Developing countries also started hoarding more-expensive U.S. dollars, leading to a glut of global savings that helped keep global interest rates low and may have contributed to the dot-com stock and housing bubbles, Baker figures. So, also maybe not such a great success.
Then came the Russian debt crisis of 1998, in which Russia mostly ignored Summers's counsel and came out looking pretty good, Baker says. Summers warned the Russian economy would collapse if it didn't take his advice. Instead, after a brief downturn, it came out of the crisis as one of the world's strongest emerging markets.
To me, Baker's framing of the 1990s crises is debatable. I can see how Summers's defenders might find it unfair to blame the whole global savings glut of the 2000s on the bailout terms of the East Asian crisis. Similarly, blaming two decades of weak Mexican growth on the 1994 bailout seems like another stretch.
But there should be little disagreement about Summers's performance in the biggest financial crisis of our time, and his contribution to it. Neither put him in very good light.
Summers was out of government by the time of the 2001 recession, but his work in the Clinton administration to deregulate the banking sector and fight the regulation of derivatives had already planted the seeds of the next crisis. Unlike Alan Greenspan and some other Clinton-era deregulators, Summers has shown no remorse about his role in creating the crisis. In fact, he has defended the idea of super-sized banks even since. Of course, some of those super-sized banks have paid him very well.
As a top economic adviser to President Obama in 2009, Summers displayed his crisis-fighting acumen by arguing against a large-enough stimulus package, contributing to the sluggish recovery that continues to this day. And he utterly failed to see the crisis coming in the first place, shouting down another economist who suggested in 2005 that one was on the way.
Summers' supporters suggest that his chief rival for the Fed post, Janet Yellen, the current Fed vice chair, lacks "the gravitas to manage a financial crisis," which is likely code for "she is a woman." Because in fact, Yellen has spent the past several years helping the Fed manage the biggest financial crisis in generations. And she has done so with far more prescience than Summers, being one of the few Fed policymakers to see trouble brewing as early as 2005, when Summers was still bullying other economists for similar warnings.
So, yes, sure, Summers has had a lot of crisis experience. But what good has it done us?
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