Larry Summers' Genius Clouds His Judgment: Regulating the Banks Will Not Work

"Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it is the only thing that ever does"-Margaret Mead

Larry Summers, the President's point man on the economy and financial regulation, is said to be a genius. With the DNA of two Nobel Laureate economists in his genome, one might think he would have the best grasp of how to fix the broken financial system.

One would be wrong. Summers would be the best to design a rational system, but it would be very difficult for him to recognize that the actors will not see everything the way he does. And so, he would have greater confidence than justified that the system he designs will work.

That confidence may be conveyed to the President, and thus, even with the best of intentions, Summers can lead him and the country down the primrose path to another catastrophe.

Dick Durbin (D-Ill.), the number 2 person in the Senate leadership, has put it simply: "the banks own Congress." Summers cannot incorporate that observation into his econometric models. Thus, the entire edifice of economic security and protection crumbles.

Big banks' pursuit of increasing profits--exactly what their shareholders and the economic system dictate as a proper goal--inevitably causes them to undertake actions that can, and have had devastating consequences for almost everyone in the world.

No 'malice aforethought' need be invoked. Miscalculation is sufficient to wreak havoc on the life achievements of hundreds of millions of people. And, we know with certainty, that the big banks will use their pivotal position in the economy and their economic resources to quash democratic processes when they are inimical to their profit-making/power-wielding interests.

Lest there be any doubt of that power, one need only note the following confluence of events: the current economic catastrophe, the banks' collapse, the taxpayers' bailout, and yet, in spite of all that, the big banks' ability to prevent Congress from enacting strong financial reform with strong consumer protection. Their lack of any embarrassment at all--other than getting caught--with awarding enormous bonuses only underscores their power.

Wall Street has far more power even than the very powerful insurance + pharmaceutical industries. Good evidence for this is that, despite the enormous loss of wealth and heightened insecurity suffered by almost everyone in this economy--i.e., that keeps the matter roiling in everyone's consciousness--Wall Street has been able to have its way with Congress, reducing new regulations to a joke, awarding themselves enormous bonuses while still owing tens of billions to the Treasury and while the rest of the economy is still reeling from the damage it caused.

Breaking up the big banks is not a Democratic, Republican, Independent or Libertarian, or liberal or conservative position. It is a common necessity to restore democracy to our politics and some security to our economic system.

It is not that the banks are "too big to fail." It is that they are so big that they can cause you and me to fail. That is not Adam Smith's capitalism; it is a system that inevitably breeds rogues.

For this reason we have started a mass movement called "BreakUptheBigBanks.com." Together, millions of citizens, regardless of political persuasion on other issues, by sacrificing only the price of a latte, can counteract the banks' corrosive power and sleep better at night, knowing that they will not awaken the next morning to discover that, without even knowing what was happening, their life's work will have vanished in a sea of credit default swaps.

It is probably the one domestic matter behind which everyone can rally.

Take a minute to click, to join, to help.

 

Comments

[Booblius]

That's the problem in a nutshell. It will take united action, regardless of your other political persuassions. They have victimized everybody as you point out in your article, even community banks are victims. While they were trying to underwrite loans they were competing with Wall Street crooks who were simple using mortgages as a wrapper for fraud. Anyway good luck on your grassroots organization.

[olephart]

"Larry Summers, the President's point man on the economy and financial regulation, is said to be a genius."

So genius is the term given to someone who got it so wrong that the entire World's economic system virtually collapsed. Someone who helped design a system that has bankrupted millions and brought about the greatest financial turmoil in history. Tell me again what qualifications are required to do this. Remind me why the President we elected felt compelled to solicit this individual's advice. This is as smart as putting your finger into an electrical socket and after picking oneself up off of the floor looking for the socket for a second try.

Genius, absolutely genius.

[dart79]

Summers, Giethner and Bernancke have lead us to disaster once and will again. They are one dimensional thinkers. Wall Street, Wall Street, Wall Street. They are lost in their intellectual underwear and do not have the strength to use common sense. Monetary masturbation. They are the tree masters.

[Trophoto]

Roubini, Krugman and Stieglitz are geniuses too and more people should be listening to them since they are the ones over the last 10 years who have consistently gotten things right. While they were correct they were poo pooed by the so-called genius of Summer, Geitner and Rubin. It amazes me that at the top levels of Banking being wrong consistently gets you promoted and filthy rich. If I were that wrong in my job I would be with the 10.2% of American on the unemployment line. being smart is not an antidote for being wrong. When you are wrong then you need to go.

[kankankan]

Summers reminds of the commercial about the genius baby that congratulates his doctor on his delivery that goes on to perform heart surgery in crowded theater or some such but is still afraid to negotiate car purchase.

What good is "genius" in one aspects of theory and equations if it never NEVER results in good for country. We all know someone that is wicked bookish smart that would be hopeless to run a business or often are so great at running their own lives.

Summer's genius has resulted in exactly what? agressive deregulation of banks during Clinton admin (result: global finanicalmeltdown 10 yrs later, as predicted by non-genius senator Dorgan from flyover state ND), trashing Harvard Endowment, and once again doing wrong thing in Obama administration.

If some high IQ guy was recommended as a investment guru to you by other high IQ gurus but his investment advice lost you money consistently, you wouldn't care how "smart" he was, his results stink.

Summers results for Wall Street have been exceptional but his results for the common wealth are horrible. Larry if your equations and genius did not predict what was coming, they cannot be relied on for the fix.

Nothing simpler than breaking up concentrated power of banks, appeals to populists, libertarians, and progressiv­es..

Summers, take your genius and go do some string theory physics where you would do no more harm than waste some grant money, leave the economy to us stupid people.

[PhilipTaylor]

Durbin’s "the banks own Congress" is something Summers cannot model. Nor can he model the impact of automated nanosecond trade intercepts that drain $Billions in value into Bank’s pockets. He can NOT model market manipulation software that can drain the life out of the populace!

Those are what is called investing these days - draining of value, theft, and dropping risk on others (mainly the Taxpayers)! How do you remove those incentives to steal and put in NEW incentives that encourage the building of a REAL Economy?

Make the theft transparent and tax the heck out of it!

[PhilipTaylor]

ITS THE CULTURE THAT NEEDS CHANGING!

SUMMERS in 1989 LED THE PACK ON SPECULATION:

Summers Article paraphrased: “Smart Speculators should MAKE the Market and once the Bandwagon Suckers, who buy when prices rise and sell when prices fall, climb on the Bandwagon then pull the carpet out from under them using Massive Leveraged Shorting!” He calls the SUCKERS "feedback traders" who race after price increases and sometimes called Momentum Traders! He explains in the article how to take full advantage of these Suckers!

http://ideas.repec.org/p/nbr/nberwo/3243.html

ECONOMISTS FOR FIRING LARRY SUMMERS http://firelarrysummersnow.blogspot.com/2009/02/rich-on-summers.html

Larry Summers = tied to Rubin/Citigroup+ Phil Gramm+ Gensler = Derivatives Scam+DeRegs!
Gensler = ex-G0LDMAN = runs Commodity Futures Trading Commission+Clinton Treasury
Geithner = President of New York FED = regulates Wall Street many years leading up to CRISIS
Geithner = Co-Authored in March (Paulson+Kashkari) the Bailout plan for Banks +hedge funds
Paul Volcker = Only Sanity in White House = Frozen out of 0bama by Summers per B1oomberg!
Arrogant Summers = Fired as president of Harvard
Brooksley Borne = Saw the Entire Crisis and wanted Regulations

[sonofsamphm1c]

Breaking up the banks will not help one single bit to either avert a systemic crisis or to mitigate a systemic crisis. There ain't no paradise where systemic risk does not exist.

[maddy48]

I think that's the Larry Summers mind set. Read the article. He's STUCK in a point of view that will destroy pretty much everything that makes you a freedom loving american & citizen of the world.

[QDP]

It's already been destroyed, and the conundrum now, is that it is plainly evident for all to see.

We are controlled by the almighty weak dollar.

[Trophoto]

Its not about the absence of systemic risk. That is myopic. Its about spreading that risk around so that on failure does not take down the entire system that has inherent systemic risk. Not unlike a stock portfolio, if the risk is spread out, the inevitable down turn (or correction) will not be as sever as if all the stock in a portfolio are in one company or sector. Its simple risk management. Somehow, the immense talent that needs these huge salaries cant see that.