According to most commentators, the president's press conference went a long way towards taking the spotlight off the roiling anger over AIG, bonuses, and Wall Street abuses -- and putting it back where the president wants it: on the imperative need to pass his budget.
But the best laid plans of our remarkable president may be laid to waste by a bank rescue plan that is the product of exhausted ideas put together by men far too beholden to Wall Street.
Even if the president desperately wants the spotlight to move on from the bank rescue, we should not allow it to. So today let me turn the high beam on one of the main architects of the plan -- less in the news than Tim Geithner, but no less important -- Larry Summers.
To understand why a man as brilliant and accomplished as Summers can be so wrong about what to do with the banks and Wall Street, it would be useful to turn to The Innovator's Dilemma by Harvard Business School professor Clayton Christensen. The book explains how even very successful companies, with very capable personnel, often fail because they tend to stick to the strategies that made them successful in the first place, leaving themselves vulnerable to changing conditions and new realities. So you can have brilliant managers who miss what's needed for success in the future because they are too tied to the past.
This describes Summers to a T.
He is one of the top economic minds of his generation, a tenured professor at Harvard by the time he was 28, with plenty of real word experience -- ranging from heading the Treasury to heading a major university. But his core beliefs and assumptions helped lay the groundwork for the current crisis.
As Treasury Secretary under Clinton, Summers played an important role in convincing Congress in 1999 to pass the Gramm-Leach-Bliley Act, which repealed key portions of the Glass-Steagall Act and allowed commercial banks to get into the mortgage-backed securities and collateralized debt obligations game. The measure also created an oversight disaster, with supervision of banking conglomerates split among a host of different government agencies -- agencies that often failed to let each other know what they were doing and what they were uncovering.
At the signing of the bill, Summers hailed it as "a major step forward to the 21st Century."
Summers also backed Phil Gramm's other financial time bomb, the Commodity Futures Modernization Act, which allowed financial derivatives to be traded without any oversight or regulation. So it was on his watch that the credit-default swaps warhead that has blown up our economy was launched.
Indeed, during a 1998 Senate hearing, Summers testified against the regulation of the derivatives market on the grounds that we could trust Wall Street. "The parties to these kinds of contract," he said, "are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws."
It would be hard to make assumptions that turned out to be more wrong than Summers' were.
For a more accurate portrayal of what Summers described as "largely sophisticated financial institutions," check out Matt Taibbi's devastating depiction of AIG's upper management as utterly clueless about the "selective accounting" scam being run by credit-default swap pimp Joseph Cassano, head of AIG's 400-person Financial Products unit (Taibbi dubs Cassano "the Patient Zero of the global economic meltdown"):
For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company -- like, for instance, how much exposure the firm had to the residential-mortgage market.
Taibbi describes Cassano getting on a conference call with investors in 2007 and, as his credit-default swap portfolio was racking up $352 million in losses, announcing: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions."
These are the kinds of "parties" Summers was so confident could regulate themselves and be "eminently capable of protecting themselves from fraud and counterparty insolvencies."
Of course, not just the Financial Products unit at AIG, but also the toxic balance sheets at megabank after megabank tell a very different story.
In a speech at the Kennedy School of Government in September 2000, Summers declared: "The traditional industrial economy was a Newtonian system of opposing forces, checks and balances... While, in contrast, the right metaphors for the new economy are more Darwinian, with the fittest surviving."
He forgot to add the part about the fittest surviving by being bailed out by the rest of us.
Real economic Darwinism -- or Randian capitalism -- would mean letting old institutions that have failed die. Keeping them on life support is not just catastrophically burdensome for taxpayers, but also prevents new institutions from flowering.
In a fawning new profile of Summers in The New Republic, we discover that Summers' tired thinking extends to the way he views being tired.
Noam Scheiber reports that "Summers functions on exceedingly little sleep.... To power through the day, Summers relies on a punishing Diet Coke regimen. The combination of fatigue and extreme caffeine intake can produce the occasional verbal and physical tic: Summers is a chronic foot-tapper and sometimes turns over words and clauses like an engine that won't start."
The notion that driving yourself to the point of exhaustion and chronic foot-tapping is a sign of commitment and achievement is as obsolete as the belief that pumping more money into the same institutions that created the crisis will solve it.
Summers' old boss, Bill Clinton, once said, "Every important mistake I've made in my life, I've made because I was too tired."
Many Wall Street high-flyers could echo this -- if they had any self-awareness. Instead, they subscribe to our culture's veneration of exhaustion. Taibbi describes how Wall Streeters, when challenged, "talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40."
The country would be better off if Wall Street execs and, more importantly, Summers and Geithner -- who, we are admiringly told, works 15 hours a day -- knocked off early and came back to work the next day refreshed... and with some fresh ideas.
Previously:
Take the Steering Wheel out of Geithner's Hands
Tune in to watch me co-host CNBC's Squawk Box on March 31st, 7-9am ET
Why does a highly technical field like economics even tolerate gurus and shamans? Is it merely because of the interface with the public and the media, who expect and need the pronouncements of authority? Or is there some deeper malaise within it, behind the technical barriers?
A few years later, Summers writes about the harmful effects of our ever-increasing current account deficits. Those deficits, and the loss of high-paying American manufacturing jobs they parallel were a direct result of his misguided policies. He never recanted the empirically proven flaw in his vision of a global capitalist economy. He and others allowed the currency manipulation that made the US the buyer of last resort, of both goods and foreign loans to pay for them.
Here he is now crafting policies to address the current economic unpleasantness. Showing how low labor has fallen in influencing fiscal and monetary policy. How low must our standard of living also fall before Obama realizes he has received very bad self-serving advice?
Paolo at econocasts.com
Details here: http://robrites.blogspot.com/2007_09_01_archive.html
http://www.forces.org/evidence/who/files/wb.htm
He is also the man who was forced out as president of Harvard University for his abrasive personal style and for arguing that women may be intellectually inferior to men. See
http://www.boston.com/news/education/higher/articles/2005/01/19/harvard_womens_group_rips_summers/
Still have a soft spot for him now?
http://www.tnr.com/story_print.html?id=aaa57c05-d73e-4321-8893-70d5b45577d1
"...Summers added, "there's a lot of work in the world for a bad economist."
He is a brilliant man, too bad he pollutes him body with Diet Cokes, and little sleep; I'd suggest a vegan diet for a few months to calm his nerves, strengthen his heart, and cause his priceless mind to bridge our gap from the old paradigm into the new.
Summers is a man who contributed mightily to dynamiting the U.S. and world economy with his neoliberal, deregulatory, free-market-fundamentalist voodoo, who thinks that women are not as smart as men (he was forced out as president of Harvard for writing that women are less capable in the sciences than men), and who thinks that Third World countries ought to be dumping grounds for Western pollution (he once wrote a memo arguing that Third World countries are "underpolluted" and should therefore accept more waste from industrialized countries). This is a man of unbounded arrogance and profoundly reactionary temperament. It should surprise no one that he is lionized by likeminded Beltway power addicts in both major parties. As for Obama's admiration for him--that's no accident either. Just think about what that says about Obama's worldview and judgment.
the (continued) greed and audacity of our banking sector.
That seems to be something that most of us can agree on.
Unfortunately Obama seems determined to restore the status quo, instead of doing what he was elected to do: initiate CHANGE WE CAN BELIEVE IN.
We're dealing with the same people with the same mindset that are more concerned with financial engineering and creating "wealth", then dealing with an infrastructural economic base, and of course we're still dealing with the same corrupt politicians who turned these greedy bastards loose.
And while both political parties want to blame the other, leave us not forget that
Glass –Steagall was removed by a vote of 92 to 8 in the Senate or that
the financial sector spent $5.1 billion in political influence-peddling over the past decade and they were hardly partisan in their approach.
Basically what they're doing now is to build lifeboats instead of fixing the hole in the ship ...
And guess who gets a seat in the boat...
guaranteed it won't be us.
The transition from one paradigm to the next is not often smooth. "...The pressure for change builds over time, but the shift itself is abrupt...attempts are naturally made to incorporate the anomaly within the existing paradigm..."; yet more often than not to no avail.
Another thing I would like them to do is put capping on interest rates, extra charges they put on credit cards and credit companies. Some of these companies have interest rates that are incredibly high, which has hurt allot of Americans also. They want to make a fortune off of these ridiculous interest rate and surcharges.
It is the policies that have ruled this country and continue to rule this country.
For example. Out of nowhere using Rush Limbaugh as a talking point. He knew he could win that battle.
When it comes to the budget mocking the Republicans. He knows he can win the battle.
But can he win the battle if he tells us why HE, not someone else, but why HE picked SUMMERS.
What is HIS economic theory. If he changes from Summers to someone else who will still hold play us like a violin by holding the left in one hand but playing the music with the right hand then he will have to honestly talk about the issues.
Just watch it carefully. He puts up straw people, not even straw arguments.
There are two ways to rule the people. Fear, and we know what that is like after the last eight years. The other way is HOPE. Until we get away from hope and demand to know what his policies are we will not see a debate from him on issues.
He will talk, or should I say articulate, for those who are so proud of his intellect, day and night. But he carefully won't show his hand and why he picked Lawrence Summers and Timothy Geithner, when there are economists like James Galbraith and others he could have chosen
Thank you for continually educating us on what REALLY goes on behind all the bells, whistles and claims.
As much as I supported Obama, I couldn't be more disappointed in his selection of Geithner.
Summers just scares me altogether. After all he is the man who made this very "intelligent" statement... "innate differences between men and women might be one reason fewer women succeed in science and math careers".... or something like to that effect. I would expect this kind of comment from a all white cigar puffing country club member in the early 19th century....but to hear something like that in this day and age from a guy who is considered a "scholar" is down right infuriating.
No Mr. Summers, it can't be that women were never allowed to educate themselves, and are just beginning to have the RIGHTS and FREEDOM to finally infiltrate the science and math world, it must be that they're so different that they're not as smart.
This guy actually makes me nauseaus.....and I have little hope for him fixing what is wrong with our economy.
How smart can these guys be if they blithely discarded the progressive, regulatory approach to markets that had guided the country to prosperity from the 1930s until the anti-New Deal of the Reagan and Clinton years? Summers’s and Geithner’s eager embrace of the ever-ramifying Wall Street Ponzi schemes of the 1990s was not genius—it was plain old blinkered Friedmanite “free-market” religiosity, recycled dogma devoid of the faintest sense of justice, compassion, or decency. If their whole intellectual construct—and the economy it engendered—now lies in ruins, how smart could they be? Only in the endlessly inept and corrupt universe of Washington, D.C., would this kind of wrongheadedness be taken as a sure sign of genius, to be rewarded with a triumphant return to power rather than the more logical deserts of exile and disgrace.
Which brings us to the key issue: the man who hired these “genius” architects of disaster—our “remarkable” president. Remarkable in what sense? I suppose it is remarkable that Obama could somehow imagine that two men whose ideas helped to blow up the economy would have even a clue about how to put it back together again.
American economy. But he CAN ruin it all over again!
Even if we didn't see the poor sad results of Summers' work, it should be anxiety-producing in the populace to know how Summers treats his body and mind.